Description
Porch.com (PRCH) is a uniquely positioned provider of home services, able to provide a menu of high LTV products and services at structurally lower CAC to highly valuable home buyers. PRCH has a tremendous open-ended secular growth opportunity with multiple levers to grow revenue organically at +30% for a very long time, as well as cyclical tailwinds and potential merger synergies in the near-term given the fragmented landscape of home products and services that can be sold on top of PRCH's platform. It is currently valued at a reasonable valuation of 6.5x 2022 revenue and suffers from general wariness as a recent SPAC and a lack of sell-side coverage. The home insurance opportunity alone is worth multiples of the current valuation today.
PRCH has a unique business model that has evolved from an HomeAdvisor-like B2C services focus, which CEO Matt Ehrlichman eventually realized had challenging economics and a lack of control over the end-to-end customer experience. The business model evolved to focus on providing services to highly desirable home buyers at the point of purchasing a home, when buyers are poised to spend a great deal of money on moving and furnishing/improving their home, have high credit scores and are unlikely to move anytime soon. The foundation of the strategy is SaaS ERP and CRM software for home services verticals. In 2017 PRCH acquired ISN, a provider of ERP and CRM software for home inspectors, which touches 28% of home inspections done in the US today. Inspectors can use the software by paying either a) SaaS fees of $4 per avg. inspection, or b) by providing access to home buyers to PRCH's Moving Concierge, which gives PRCH access to home buyers with a tremendous amount of unique data on the home for zero customer acquisition cost. 41% of inspectors pay with customer access today vs. zero 3 years ago, and 75-90% of new inspectors pay with access.
PRCH is then able to leverage their unique access to buyers and home data to efficiently sell products and services with great customer service. PRCH's Moving Concierge provides free white-glove service to home buyers to simplify the process of buying home insurance, moving services, home security, internet and other services needed when moving into a new home. Inspectors benefit from association with this easy, positive experience with a 73 net promoter score which helps to drive repeat business to them. On average PRCH monetizes 6x higher ($25 per avg. inspection) when they have access to the buyer. Overall, PRCH's strategy generates an LTV/CAC of 30x on the average inspection company acquired.
PRCH has multiple levers for organic growth. PRCH will continue to expand their SaaS software presence in various verticals. Their share of US home inspections is steadily increasing (from 26% in 1H19 to 28% in 1H20) with inspection software improvements and the addition of capabilities (e.g. payment processing). They will nudge more inspectors into paying with buyer access by raising SaaS fees and making certain modules only available to companies that pay with access. The potential revenue opportunity is enormous since PRCH can receive $314 net commission per move, $114 net commission per TV/internet installation, and $220 net commission per security installation, compared to $97 per monetized service today. PRCH's annual P&C home and auto insurance TAM is ~$160B.
PRCH made 4 recent acquisitions to better monetize home inspections and to broaden their home services software reach (fast access to capital to make these deals was why PRCH chose to go public via a SPAC). The HOA acquisition enables PRCH to double their take of each home insurance plan sale as they go from agency to MGA/Carrier economics. The V12 acquisition connects brands with lucrative pre-move and post-move home buyers. HOA and V12 were acquired for 2x 2021E revenue pre-synergies. iRoofing provides SaaS software to roofing contractors and Palm-tech provides software to smaller home inspectors, and their customers can be added to the Porch.com network.
The insurance business is especially attractive due to the annual recurring revenue generated from plans, and PRCH's unique data and zero incremental CAC should translate into competitive plan pricing. HOA is expected to underwrite $270m of gross written premium in 2021E, growing at least in line with the overall business. LMND is expected to grow in-force premium by +76% to 378m by 12/31/21 or 12x 2021 EV/GWP. Hippo is going public through a SPAC and is expected to grow +34% to $544m of GWP in 2021, valuing the company at 9x EV/GWP. PRCH's insurance business alone could be valued at a multiple of the current enterprise value, ascribing no value to the opportunity in other home services verticals.
The biggest risk to growth is execution but checks on the CEO have come back positive. Matt Ehrlichman's "superpower" is his ability to spot value-enhancing strategic acquisitions, which can be readily harnessed by the Porch.com platform. The team has developed a playbook for merger integrations and PRCH's tech stack is built on scalable microservices architecture. While we have some reservations about some of the other executives, PRCH recently announced a series of seasoned new executive hires that will support the company's next phase of growth and expansion.
Given the fragmentation of home services companies and the tremendous home services TAM, PRCH has an incredible opportunity to continue acquiring subscale companies at accretive multiples. The roll-up opportunity, combined with the existing organic growth opportunity give PRCH a long runway to sustain high growth for years to come. There are hundreds of subscale home services software companies that PRCH can acquire at low multiples and enhance to generate massive synergies. For example, PRCH can buy other home inspection software companies that do not have the scale to build integrations with movers, cable companies, home security companies, etc. and therefore have limited LTV potential. We believe the current revenue multiple can easily 2x from here and on top of that you get the high secular, short term cyclical and M&A–related growth ahead of you that will naturally compound value over time. The company’s long term ebitda margins are targeted to be in the mid 20s (we believe this is conservative) and the company is committed to show margin leverage every year.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Strong execution, additional accretive M&A, improved sell-side coverage