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Olo Stock Is A Buy At The Current Levels (NYSE:OLO)

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feeling (NYSE: OLO) Reports $597 million in cash to hire new employees as well as to develop more programs. The company receives good feedback from well-known restaurants, and the management is signing new agreements with existing companies. Under the best case scenario, Olo will develop more APIs, sign new agreements, and acquire other competitors. My DCF model with conservative assumptions resulted in a target price of $50. Of course, I am a buyer at the current price.

Olo: scalable technology and happy big customers

New York City-based B2B SaaS Corporation Olo is a leading on-demand commerce platform that is enabling the digital transformation of the restaurant industry.

The company considers itself the most reliable number-demand engine in the market. The company’s systems are capable of processing thousands of requests per minute during busy periods, and offer scalable technology:

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feeling

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With prior technology capabilities, it makes sense for major customers in the US to work with Olo. If you’ve received an order from Five Guys, Subway, or Denny’s, Olo will likely have processed your application:

The company not only works with some of the largest restaurant chains in North America, but it also works with a lot of small, medium and large restaurants.

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Feedback from customers is very helpful. I cannot break down all the results obtained in each restaurant, so let’s note the most relevant ones. Five Guys claimed to have an average order volume of 25% higher thanks to the company’s software integration:

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feeling

Besides, Cold Stone Creamery has reported a significant increase in the number of customers who want to use the Olo platform again:

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feeling

With great results and working with big clients, market estimates are quite optimistic about Olo

Olo has received a lot of attention from investment analysts thanks to the results shown by some clients. Most members of the investment community expect double-digit growth and double-margin EBITDA in the next two years. Market estimates include a sales growth rate of close to 36% in 2022 and 2023. Besides, EBITDA and FCF/sales margin will remain at 13% and 11%, respectively.

Take a look at the numbers provided by other analysts. Keep in mind that my numbers are not far from theirs:

Author and market estimates

Author and market estimates

Base case scenario: Integration with 3rd party delivery service partners and new APIs

I think the company has many options to increase the number of customers and its operational size. The most interesting is the integration with third-party DSPs on a single software platform. As a result, I expect a significant increase in financial profit margin and revenue growth:

Integration with a national network of third-party DSPs that run together on a single software platform, in some cases offering up to eight different delivery providers per market and covering 97% of our customers’ store locations in the US. Source: prospectus

I also believe that further development in the company’s APIs and web hooks will help customers increase automation. think about it. Most restaurants usually do many repetitive tasks on a daily basis. If Olo can help business owners develop algorithms that reduce costs and simplify operations, revenue could rise:

We have published POS API and Loyalty API standard which have been adopted by many loyalty and point of sale service providers respectively. We use both cloud-based APIs and, when necessary, legacy in-store proxy-based technologies. The in-store agent software uses our real-time protocol, which can work over low-bandwidth connections and does not require restaurants to open incoming firewall ports. Source: prospectus

With the global software market as a service market growing by 11%, under this scenario, the sales growth will be 29%-26% in 2022-2024, and 11% from 2025 to 2032:

Valioates reports that the global Software as a Service market size is expected to reach $307.3 billion by 2026, from $158.2 billion in 2020, at a compound annual growth rate of 11.7% over the period 2020-2026. Source: Software as a Service (SaaS) The market size is expected to reach $307 billion by 2026

If we also used an EBITDA margin of 14%, which is close to the margins reported in 2022 and 2025, the 2032 EBIAT would remain at $57 – 67 million:

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Author’s books

With D&A around $10 – $23 million, D&A/sales at 2.93%, and capital expenditures of $4.6 to $1.86 million, the IMF remains at $24-70 million. Note that my FCF margin is quite conservative at 7%-9%:

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Author’s books

Assuming a weighted average cost of capital of 7.5%, the fund’s net present value would remain at $262 million. I also used an exit multiple of 21x, which means a market capitalization of $1.32 billion, and a fair price of $23.26:

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Author’s books

Best case scenario: More acquisitions, successful mergers and acquisitions

I am quite optimistic about my latest purchase of Wisely. In my opinion, if the merger with Wisely Inc. Correctly, we can expect revenue growth from synergies. but that is not all. If management succeeds, we could see more inorganic growth, which means big growth in sales.

Olo Inc. announced. Today it completed on November 4, 2021 the acquisition of Wisely Inc. A leading customer intelligence platform that enables restaurant brands to customize the guest experience to maximize customer lifetime value. Source: Olo – Olo completes Wisely Inc . acquisition

I also think the partnership with Uber (NYSE: UBER) It brings more volume. I think Uber recognized the Olo technologies, which would provide great brand awareness. In my view, large companies would be willing to work with Olo:

The agreement follows Uber Eats’ 2019 integration into the Olo Rails platform and its 2020 acquisition of Postmates, significantly expanding the courier base to serve the nation’s most successful restaurants. The new integration enables restaurants that have partnered with Olo to expand their direct delivery capabilities and prepare to take advantage of the growing alcohol delivery space, while improving price, timing and quality of service through the Uber technology network. Source: Olo – Olo expands partnership with Uber

Under this specific scenario, assume sales growth of 25%-20%, EBITDA margin of 15%, and capital expenditure/sales of 0.65%-0.6%. FCF results include approximately $20 – $175 million.

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Author’s books

If Olo reports previous financial numbers, I think most investors will study the business model carefully. As a result, the demand for the stock may increase, which can lead to a decrease in volatility. Given these beneficial factors, using a high concentration and cost rate (WACC) of 6.05% would make sense. In short, a fair price will remain close to $50:

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Author’s books

Olo has cash on hand to fund research and development efforts as well as augment marketing efforts

As of September 30, 2021, Olo has announced $597 million in cash, and an asset/liability ratio close to 10x. In my opinion, management has enough cash to invest in research and development, develop new APIs, and sign new partnerships with large companies:

quarterly report

quarterly report

I also very much appreciate that the company reported $2 million in unearned revenue and no financial debts. It means that customers pay up front and finance the company’s operations:

quarterly report

quarterly report

Risks of rapid growth and lack of partnerships

Olo grows very quickly, which carries certain risks. The company is working with more and more customers, and they expect Olo’s technology to work successfully. In my view, Olo will have to hire a lot of employees to handle the demand for its products. Besides, the company’s systems have to be more complex because the amount of data has increased exponentially. If for any reason some requests fail, or if data management is unsuccessful, Olo’s brand reputation may be damaged. As a result, sales growth may be lower than expected:

Any issues with the transmission or storage of data and increased demands could damage our brand or reputation. Furthermore, as our business grows, we will need to allocate additional resources to improving our operational infrastructure and continuing to enhance scalability in order to maintain our platform’s performance, including by improving or expanding our cloud infrastructure. Source: prospectus

If management can’t sign new agreements with partners such as payment processors, digital agencies or distribution service providers (DSPs), I think sales growth could decline. In addition, existing partners may decide to negotiate their agreements, which may reduce the company’s profit and loss margins. As a result, I expect a decrease in the fair valuation of the company:

The success of our platform depends, in part, on our ability to integrate third-party applications, software, and other offerings into our platform. We expect our business growth to continue to rely on third-party relationships, including relationships with point-of-sale, point-of-sale, systems, distribution service providers (DSPs), aggregators, digital agencies, payment processors, loyalty providers and other partners. Source: prospectus

away

With $597 million in cash, Olo has enough resources to invest in new units and pay more sales people. Thus, I expect more technology, new APIs, and partnerships. If management continues to acquire other competitors, Olo will see even greater sales growth. Under the best of circumstances, in my opinion, the company’s share price could reach $50. Yes, I see some risks from rapid growth and technological challenges, but I am a buyer at the current price. The expected free cash flow justifies a higher valuation.

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