It’s been chaos for restaurants over the past year. We’ve seen the rise of DoorDash (DASH), GrubHub (GRUB), and Uber Eats (UBER) to address the acute need for widespread food delivery.

Longer-term this is just a huge catalyst to re-engineer the business. Once menus are online it’s simple to just use a QR code for diners to access the menu on their phone whether they are in the restaurant, having delivery, or picking up food curbside.

It’s not the “restaurant” business anymore – it’s “consumer dining” and it’s opening up lots of opportunities for technology and service providers.

Even with the rush into getting more food delivered and picked up online ordering is still a relatively small portion of the business with lots of room to grow from these levels.

Olo is a technology platform for fast-casual chains like Shake Shack (SHAK), Cheesecake Factory (CAKE), Denny’s, Jamba Juice and Jimmy John’s, and many others. They provide an enterprise SaaS platform for these restaurants to run the consumer-facing side of their business focused on ordering and delivery.

In an analogous way that Shopify (SHOP) serves as the core system for an online retail business the Olo platform provides restaurants with a platform for managing their menu items, processing online orders, dispatching, and create tailored offerings into different channels.

Business Model

Olo has built a software platform that serves as a a core system for fast-casual restaurant chains to manage their menus and online ordering process. The system is built to address their needs for scale, flexibility and integration with hundreds of other systems.

They go to market by selling directly to the large chains using a SaaS model that charges a flat fee per location and scales up based on usage. (Similar to the Snowflake (SNOW) model although in this case it’s more aligned to customer revenue.)

During the roadshow, the company takes a swipe at DoorDash in noting that they don’t rely on charging “untenable fees” to their customers but instead employ a combination of a fixed fee and usage-based pricing. (BTW You can download the full transcript of the Olo Roadshow from their page on IPO Candy Pro.)

Large restaurant brands have unique requirements and need to control their customer experience at a regional or even national level. They’ve been able to do that on-premise in the past but now they have to do it everywhere.

The Olo platform allows them to manage their inventory (menu), online ordering and fulfillment (delivery or otherwise.) Their software is designed to handle these functions are scale and also integrate with the myriad other technology systems restaurants rely on. It’s a combination of applications and integration “glue” that allows orchestration of the entire process.

Rather than go directly after restaurants Olo has focused on the large chains. Their customer list is already pretty impressive.

Olo offers three different products – Ordering, Delivery and Platform. Their growth is based on adding more locations, increasing ARPU via additional usage fees, and getting more customers to use multiple products.

Over the past year or so the company has been successful on pretty much all these fronts.

Because Olo targets large players they run with a very different business model than the direct-to-consumer companies like GrubHub and DoorDash. The big savings is in sales and marketing costs which they can direct into R&D and allow to drop to the bottom line.

Despite heavy R&D spending, Olo is already achieving strong operating margins of 16% (22% non-GAAP).

Exploring Comparables

Long-term investors in this space may remember OpenTable which was one of the first “restaurant technology” players to achieve scale. Restaurant reservations were the focus for OpenTable so they targeted the higher end of the market. Restaurant owners didn’t end up loving OpenTable because the fees really added up and cut into margins. Some even built their own systems to eliminate or at least reduce OpenTable fees.

Priceline, now Booking Holdings (BKNG), bought OpenTable for $2.6B in June of 2014. OpenTable still offers a decent solution for restaurants but there are now more alternatives out there.

Consumers are trending towards simpler systems like Google Reservations but restaurants still have to manage their tables and need tools like OpenTable for that even if consumers come in through different channels.

So far the reservation-based restaurant industry has been slow to adapt to the new model. We’ll see if it stays that way but a year into the pandemic there hasn’t been major innovation there.

In thinking about comparable stocks I like to take an expansive view. SaaS models, especially “sticky” enterprise and B2B flavors, get high valuations.

Olo is small and growing much faster than average so while the 35x trailing revenue feels high (this is hard to write for me but I realize it’s 2021). But revenues are growing ~100%. That would put it more like 15-17x current revenues which is inline with names like Etsy (ETSY), Wix (WIX), Square (SQ). Even DoorDash (DASH) is at 15.6x and I’d prefer Olo at $25.

Our PFV below is what I tend to rely on when valuing high-growth stocks.

Valuation & Stock Conclusion

As an investor I like to own the software infrastructure underlying a new growth area so Olo has a lot of appeal. Of course it is also resonating with market so the shares will price high and trade even higher with the first trade. Our PFV model below suggests a $48 share price which is 2x where the shares are likely to price.

Notes from the Roadshow

  • Shares outstanding: 142M
    • Price range $16-18 (INCREASED the range to $20-22)
    • 2020 Revenues of $98M were up 100% Gross profit margins 80% Operating margin 16% (!) Non-GAAP 22%.
    • Founder CEO gave up his job and opportunity to go to Harvard.
    • Started in 2005 with “primitive tools” and mobile ordering was considered “crazy.”
    • B2B2C platform for restaurants. Another OpenTable model. Similar to GRUB, DASH, less so UBER.
    • Lots of different platforms needed – payments, tablets, etc.
    • Reiterates how tough menus are if you want to do it right (allergies, pricing, stock)
    • Third party orders create operational challenges. (Again part of the DASH story)
    • There’s been a huge shift to “off premise” dining.
    • Takes a big swipe at those charging “untenable commissions” like DASH.
    • Daniel Meyer, ended 14 year stint at OpenTable in 2014. Was told OLO was “this is the one!” Going to do for fast casual what OpenTable did for reservation-based restaurants.
    • SaaS model includes a fixed fee and a usage-based component. ARPU is based on location. So more locations, and increasing ARPU drive overall growth.
    • By selling into the brand they have much lower S&M costs versus traditional “shotgun” models.
    • Instead they can invest more in R&D ($31M last year) focus is on technology moat.
    • Digital orders still less than 10% of total orders for restaurants. The TAM for them is $7B and can expand as they address SMD and Global which could be $40B (?)

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