$PRCH - Porch Group - Porch.com

Here is the writeup I sent to my paid subscribers on Monday when $PRCH was trading under $15.00 — right now $PRCH is trading above $17.60 (almost 18% higher)

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$PRCH - Porch Group

Customer website: Porch.com

Corporate website: PorchGroup.com

Stock price: $14.90

Market cap: $1.2 billion

Enterprise value: $1.4 billion

Shares outstanding: 81.5 million

Headquarters: Seattle, Washington

Founded in: 2012

Founded by: Eric Schleicher, Ha Phan, Matt Ehrlichman, Ronnie Castro, Scott Austin

Current CEO: Matt Ehrlichman

Employees: 400+ 

Funding: $120 million [click here]

Phone: 800-604-2454 or 855-277-5045

Email: homeowner@porch.com


Porch on Facebook - 164k followers [click here]

Porch on Pinterest - 140k followers [click here

Porch on Twitter - 20k followers [click here]

Porch on YouTube - 5k subscribers [click here]


2018 revenues: $36 million with 81% gross margins

2019 revenues: $57 million with 83% gross margins

2020 revenues: $73 million (est.) with 76-78% gross margins

2021 revenues: $171 million (est.) with 79-81% gross margins


Porch historical timeline [click here]

Porch expands partnership with Lowes, May 2016 [read here]

Porch partners with FinMkt, June 2020 [read here]

Porch announces reverse merger with PropTech SPAC, July 2020 [read here]

Porch starts trading on Nasdaq after SPAC merger, December 2020 [read here]

Porch announces $120+ million of acquisitions, January 2021 [read here]

Interview with Porch.com CEO, October 2020 [watch here]


Investor Presentation, July 2020 [click here]

Investor Presentation, December 2020 [click here]

Investor Presentation, January 2021 [click here]


OVERVIEW:

Porch Group aka Porch.com aka $PRCH operates as a vertically integrated software company for both homeowners and service providers. You could also say that $PRCH resembles a marketplace business model with a lead generation service for contractors and other service providers.

$PRCH might only have a $1.2 billion market cap but the business model is quite unique and complex so I’ll do my best to simplify it. I should mention when $PRCH first launched 8 years ago the company was primarily focused on connecting contractors with homeowners however they have now evolved into a full service homeowner platform.

Over the years $PRCH’s management team realized it was critical to not only build relationships with customers before they became homeowners but also maintain those relationship in perpetuity. $PRCH decided to build software products for inspection companies and moving companies then gave them the option of either paying for the software as a traditional SaaS subscription product or they could use the software for free but had to share their customers with $PRCH. The majority of these inspection and moving companies picked the latter which gave $PRCH early access to these soon-to-be homeowners.

As you can see below $PRCH is focused on getting in touch with these new homeowners as soon as possible which gives them the best chance of maximizing LTV (lifetime value).

Once $PRCH has a potential customer in their database they begin building a relationship in an effort to become their “one-stop-shop homeowner operating system”. $PRCH wants to be right there to step in and assist with everything from inspection services, to moving services, to home insurance, to setting up internet/cable, to finding local landscapers, to finding local painters, to finding local security companies and on and on and on. $PRCH understands that many homeowners are moving to new areas where they need help finding reputable service providers that have already been screened and reviewed by other $PRCH customers.

It’s clear that $PRCH has developed one of best customer flywheels I have ever seen — giving away free ERP and CRM software to 11,000+ service providers (like inspection companies and moving companies) in exchange for their customer database. This genius strategy gives $PRCH a significant competitive advantage going forward. Due to this incredible flywheel, 65% of all U.S. homebuyers are going through some product on $PRCH’s platform and as a result 27% of all U.S. homebuyers are introduced to $PRCH’s “Moving Concierge” approximately six weeks prior to their move which is when most major homeowner purchasing decisions are made.

$PRCH has several wholly-owned brands, including Inspection Support Network (ISN), Elite Insurance Group, HireAHelper and Porch.com. In 2019, $PRCH brands processed $2.2 billion of gross receipts through its platform however this is just the beginning as $PRCH believes their current TAM with the help of several recent acquisitions is more than $300 billion.


COMING PUBLIC:

$PRCH came public in 2020 through a reverse merger with the PropTech Acquisition SPAC [read here].

Tom Hennessy, CEO of of the PropTech Acquisition SPAC said “Porch aligns well with the objectives laid out in our property technology investment thesis. Porch brings significant innovation to the residential real estate industry by delivering critical home services in a scalable, software-based platform. Porch’s early access to millions of homebuyers through its 11,000 contracted companies brings to the public market an established company with a track record of significant revenue growth. Porch’s massive addressable market and software platform are well-positioned to deliver high gross margin, attractive unit economics and a well-defined path to achieve profitability in 2021. We are partnering with a world-class leadership team that shares our vision.”

Prior to $PRCH coming public via SPAC they had raised $120+ million from an elite group of investors including Battery Ventures, SV Angel and Founders Fund.

The chart below shows how much capital $PRCH raised as a private company and when they raised it. This information is also available on Crunchbase.


BRANDS:

As I mentioned above, $PRCH has many different brands, each of which addresses a different segment of the homeowner and/or homebuyer market. Some of these brands were created in-house while others came via acquisition. You can read about each of these brands at PorchGroup.com/companies

As far as I can tell each of the $PRCH brands is either a B2C service which is creating demand from homeowners and then being passed off to the service providers in the form of leads or it’s a B2B SaaS product (ERP/CRM) which is being used by the service providers as a subscription fee product or it’s being bartered for customer databases.

I don’t have enough room in this newsletter to deep dive on each brand but they all have their own website if you want to read more about them [click here]


M&A STRATEGY:

$PRCH might only be a $1.2 billion company and a recent SPAC company but they are not afraid to do M&A deals. Matt and his management team believe that acquiring other homeowner focused companies at reasonable valuations will help lower their CAC (customer acquisition cost) while increasing their customer LTV. In just the past couple months $PRCH has done 4 acquisitions totaling $122 million. These 4 deals further emphasize $PRCH’s ambitions to be a vertically integrated platform for homeowners.

I pulled these summaries from $PRCH’s Investor Presentation in January.

Based on recent comments from $PRCH’s CEO, it sounds like M&A will continue to be a big component of their growth plan moving forward. As long as they stay disciplined on price I don’t see anything wrong with this. Many of the homeowner segments that $PRCH operates in are extremely fragmented so perhaps they can execute a successful rollup strategy. One of the typical concerns with aggressive M&A strategies is dilution assuming the company has to issue more shares to complete the acquisition however it seems that $PRCH is being very diligent and only buying companies that will be accretive to earnings so any dilution from additional stock offerings would be absorbed with the addition of those new revenues and earnings from the company being acquired.


B2C (Business-to-Consumer):

As stated earlier, many of $PRCH’s brands are constantly acquiring new customers/homeowners looking for different products, services, contractors, etc. These homeowners/leads are then passed along to their service provider partners for a fee.


B2B (Business-to-Business):

Service providers are using $PRCH’s ERP and CRM software products to run their businesses more efficiently. $PRCH gives them the option of paying SaaS fees or providing access to their customer databases.


ISN (Inspection Support Network) is used by thousands of inspection companies around the country. Most of these companies are opting to give $PRCH access to their customers at the perfect time…as they’re in the process of buying or selling a home. This is when $PRCH pounces all over them.


Hireahelper.com provides software and leads to moving companies but it’s also a marketplace for consumers to find reputable moving companies. More than 3,000 moving companies have joined HireaHelper which doesn’t cost them anything however they do pay a 29% commission on any business generated from the marketplace. HireaHelper allows consumers to see prices, availability and reviews before hiring a moving company. The average rating on HireaHelper is 4.8 stars out of 5.0 and that’s after 172,768 customer reviews.


CONTRACTORS:

$PRCH also runs a service for finding reliable contractors that have been screened/vetted by the company including background checks, insurance checks, etc. Every homeowner I know has a problem finding a trustworthy, dependable contractor that won’t price gauge them so $PRCH is trying to reduce that friction and take one more burden away from homeowners while generating significant revenue opportunities for contractors. If you scroll down you’ll see some links to interviews with different contractors whose businesses have dramatically expanded thanks to $PRCH.

Electrical contractor on Porch [watch here]

Painting contractor on Porch [watch here]

Landscaping contractor on Porch [watch here]

Plumbing contractor on Porch [watch here]

Learn more about Porch Pro: https://porch.com/pro


PARTNERS:

$PRCH has partnered with dozens of companies to offered the best products and services at the best prices. This includes everything from insurance to self-storage to security to cable/internet. $PRCH collects lead gen fees from these companies.


INTEGRATIONS:

As I was wrapping up my research this morning I came across an article that talked about $PRCH’s new integration in the Facebook marketplace and although I didn’t get a chance to test it out I figured it was worth a mention. More companies are learning how to leverage social media to not only build awareness but also engage with potential customers and generate higher quality leads for the sales team. I was also impressed with what $PRCH is doing across their different social media channels, especially Pinterest.


REVIEWS:

One of the only red flags I came across while doing my due diligence on $PRCH were some bad reviews on TrustPilot although overall the company gets 4 out of 5 stars with 67% of the reviews being EXCELLENT and only 17% being BAD which is a better ratio than their competitors such as Thumbtack. I do think reviews are an important data point but not the only one.

$PRCH does provide some protection against losses and sleazy contractors although $1,000 doesn’t seem like much. I guess it’s better than nothing. I did read some of the bad reviews and most of them are related to contractors that took deposits and either never finished the job or went too slow or did a poor job or overcharged them.


MARKET OPPORTUNITY:

I think it’s pretty obvious that $PRCH is going after some pretty big markets when you consider the hundreds of billions of dollars spent every year by homeowners for different services not to mention our country is currently going through a massive real estate boom as more people leave the cities and move to the suburbs. $PRCH is perfectly positioned to capitalize on this trend thanks to the customer flywheel we mentioned earlier.

$PRCH has only scratched the surface of what is possible as they continue building the leading platform for homeowners and service providers.


FINANCIALS:

We finally get to the financials where the story gets even more exciting. Even though I love what $PRCH is doing and I totally buy into their vision and applaud their customer flywheel, at the end of the day it’s the financials that really drive valuation and stock price appreciation.

$PRCH recently raised their 2021 revenue guidance to $170 million which would be 134% YoY growth…but…as you can see from the chart below, a chunk of those revenues are coming from recent acquisitions. However even without the recent acquisitions $PRCH would have seen revenues grow by at least 66% this year which is still remarkable especially when you consider gross margins are expected to be 80% this year.

Add it all up and you have a $1.2 billion company growing revenues at 134% with 80% gross margins and a massive TAM plus a ton of accretive M&A opportunities on the horizon. This is the kind of story that gets me excited and why I’m so attracted to small cap growth stocks.


Looking at full year estimates for 2021 you can see that $PRCH is still expecting to lose money this year however their growth potential plus their gross margins should give them enormous operating leverage in the future. I’d expect $PRCH to be profitable within the next couple years as the company has already acknowledged the importance of becoming cash flow positive as soon as possible.


VALUATION:

For every high-growth small cap company it’s always a challenge figuring out the right valuation. Rarely can you use P/E multiples since these types of companies are still in hypergrowth mode and more focused on growing revenues than turning profits… as they should be.

You can also use P/E multiples or EV/S multiples or the Rule of 40 which is a popular valuation metric amongst tech/software companies. Regardless of which valuation metric you use for $PRCH, they look undervalued compared to other software companies as well as they industry peers such as Angi HomeServices (formerly AngiesList).

Right now $PRCH is trading at just 7x 2021 sales which is way too cheap in my opinion. I don’t know the right multiple, nobody does, but I do believe the company deserves a higher multiple, perhaps in the mid teens given their growth rate, gross margins, TAM and M&A strategy. In this scenario, giving $PRCH a P/S multiple of just 14 based on 2021 sales estimates would give the stock 100% upside by year end.


CHARTS:

I’m not going to spend much time on the technicals since there’s no obvious moving averages to support the stock price unless it pulled back into the $13.50 range and met the 50 day moving average although I think that’s unlikely. I included this chart to show the stock has recently pulled back 22% from a high of $19.20 which I believe now offers an attractive entry price. If we did get a further pullback to the 50 day moving average I would be very aggressive with my buying/adding.


MANAGEMENT:

From everything I’ve seen and read thus far $PRCH appears to have a strong management team. Most executives from recent acquisitions will be staying with the company for the foreseeable future to assure a smooth transition.

For full team bios [click here]

The only caution flag with regards to management is the CEO’s rating on Owler although honestly 69/100 is not horrible. It’s probably a little bit below average but it’s nothing that’s going to keep me up at night. I’ve also seen plenty of comments saying that he’s a great founder and leader.


CONCLUSION:

To wrap up this writeup I just want to reiterate that I’m a big fan of this company, their mission, their business model, their customer flywheel and their fundamentals. It’s very hard to find a company growing this fast with high gross margins in a TAM that’s practically endless. I’ve been looking for a couple ways to play the real estate boom in the small cap sector and I’m glad I found $PRCH. Of course the company is not perfect and there’s definitely some competition in this space but the market is big enough for multiple winners.

I know a lot of contractors from electricians to plumbers to painters to roofers to remodelers…. and every single one of them sucks at marketing. These men and women might be amazing at their craft or trade but they’re not good at marketing and they’re not good at finding new customers which means they rely on companies like $PRCH to help them generate demand and grow their businesses through referrals and lead generation programs.

If $PRCH was just another marketplace that connected contractors and homeowners I don’t think I’d be very excited but the fact that they have pivoted into a vertically integrated SaaS platform with a tremendously valuable flywheel has me very excited about the future for $PRCH.

I think the current valuation is way too cheap and the stock should be trading in the $20s very soon and perhaps in the $30s by this time next year. My focus for this newsletter is to find companies under $10 billion market cap that I believe can 5x over the next 5 years and $PRCH is definitely one of those companies. With that said $PRCH is now my third largest position at 6.4% so I’m clearly very bullish on this company. I expect more investors to start learning about $PRCH in the coming weeks and then we’ll likely see this stock trading higher when that happens.

Thanks for reading and feel free to reach out to me with any questions or comments.

Disclaimer:  The stocks mentioned in my newsletters are not intended to be a list of buy recommendations but rather some ideas for your watchlist. Perhaps they end up in your own portfolio after you conduct your own research and due diligence. Some of the stocks mentioned in my newsletters have smaller market capitalizations and therefore can be more volatile. I always encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizing in accordance with your own risk tolerance and investment objectives.