Chit Chat Stocks - Olo (OLO) | Deep Dive

Episode Date: April 11, 2021

Olo Inc provides a software-as-a-service for multi location restaurants such. The company has benefited from pandemic trends. As restaurants have been forced to pivot to digital ordering platforms, Olo was there to help. Listen in as Brad, Brett, and Ryan dive into the company and where it may grow from here. As always enjoy the show! Subscribe to Potential Multibaggers: https://seekingalpha.com/checkout?service_id=mp_1308 Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (4:30) Industry | (9:24) Management & Ownership | (14:14) Valuation | (17:17) Earnings | (18:18) Balance Sheet | (21:16) Our Analysis | (23:17) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode. We got Brad Freeman on. I think this is our fourth episode, so we're at the monthly start here with Brad, or is it five? I think this is five.

Yeah, this might be number five. All right, we're getting into the groove. Six. Six, wow. I was really discounting us there. Time has flown. But Brad, how are we doing today? I know that NanoX is a company you followed and there's some big news this week. We were talking about that before. A lot of excitement. Yeah, that's been pretty wild this week. It got the first FDA clearance that it's been seeking on the X-ray intellectual property that it's been developing for almost a decade. So, um, was very excited about that. The stock went from like 40 to 70 and pre pre-market on Fonte and then now right back to where it was. Um, so I've been using the opportunity to, to add a little bit, but it's a, it's an interesting story. I'll say, well, we were a

bit, you know, it's a pre-revenue company, so we were a bit skeptical and looking at it, but, uh, it'll be interesting to follow on the, on the skepticism for sure. I mean, there was a lot, there still is a lot to prove for the company um and i i'd say um people should really dig in and do their homework on this one before buying it because there are a lot of loud voices who think very negative thoughts about this company so if you're gonna if you're gonna buy be all in for sure it's turning into a battleground stock for sure definitely uh we have a new sales pitch though before we get to holo we're talking holo just so everyone knows right i think you already mentioned that, but our new sponsor, do you want to talk about it? Yes. So it is called

Potential Multibaggers. Now you may know what this is. It is from the account at FromValue on Twitter. And this is a service through Seeking Alpha and they're seeking to find stocks that go up 10 times over the next 10 years. So really looking for those companies that are outperformers and are compounding at 26% per year. You want to talk some of the examples that they have in the past? First of all, if you've ever engaged with Chris on Twitter or anything like that, he's a friend of the show. He's been on here.

We really enjoy him, and he's a great analyst. I don't know if he'd call himself an analyst, but he is a great analyst. And some of his picks were Shopify at $77. It's like $1,100 now. C-Limited at $54. Okta at $64. Roku at $113. Square at 75

Livongo at 24 The list goes on And this is only out of 23 potential multi-bagger picks So it's not like he's just spraying and praying These are not, you know It's not just picking every stock and watching them go These are a concentrated basket of companies It is, in all seriousness

One of the best track records of recent years That I've seen And if you want to become a multi As they are called You can go to either Seeking Alpha and look up from growth to value google from growth to value or potential multi beggars or find chris at from value on twitter uh no promo code for us like seven investing but we think both those services are fantastic we'll be talking about both as potential services for

people to have but yeah we'll throw a link in there too i think we'll throw a link in the description in the description if you're having trouble feel free if you start talking with chris I know they do like weekly discussions, I believe, or maybe not weekly, but you can discuss with them. Feel free to tell them CCM sent you. Yeah, for sure. All right. Enough with that. We're talking to Olo.

Great company. I don't know. I'm a little off track after the ad. Sorry, it was the first time we did that, but we'll toss it over to Ryan because this is, what did they IPO like three weeks ago or something like that? So really new to the public market. It's going to be interesting to talk about. So OLO is short for online ordering, and its goal is basically to help restaurants customize and manage their entire digital ordering process. And they primarily sell to multiple – so multi-location restaurants.

It's not just mom-and-pop shops. It's more like – it's national change, international change, so Applebee's, Chili's, Shake Shack, Wingstop. All behind that. Cheesecake Factory. I mean, there's – the list goes on. But the point is those are sort of the bigger chains. I think they have 400 brands altogether. And the way they sell is through three different products.

So they have mobile ordering. This is their white label solution. And it's basically, this is how you customize your mobile ordering process. And so you subscribe to the solution and then you can go from web experience, mobile app, phone orders. they all get processed into a single place, but then your customer interface on that mobile order, you can design and customize it a little bit. So if you've ever used, for example, I use a Sweetgreen. If you've ever used their mobile ordering process, which I have, it's really nice. They've gone through Olo to do that. And then you can also, with this subscription as the

restaurant, you can manage your menu inventory and create changes in real time. So there's never anything wrong on that side and then there's dispatch so once you've received an order where it's uh like a delivery order you can pick the delivery service um so it's sometimes you know you think about all the third party delivery services doordash uh uber eats grub hub gosh am i missing any there's a lot i don't know i saw i've seen the name gopuff floating around lately I have no idea what that is either and so many there's so many there's yeah so you can do that or you can pick your own delivery team based on a number of stuff so cost pricing uh time for delivery you can it's basically you're aggregating them all and picking the best delivery service to

use and then rails is the last module or product and this basically helps you integrate your partnership with a third-party platform. So, if a customer goes through DoorDash or Grubhub and they go to that app, they need to know that your menu is up to date. Yeah, I've had that issue. Right. And so, the Rails feature allows you to update that stuff all in real time. And then the other part is it also throttles down. So, if you subscribe to this product, actually, sorry, it's not, I don't think it's subscription. I think it's on a transactional basis, but those orders end up going to the same place as your mobile orders, web orders, phone orders, that kind of thing. And so the first one, the mobile ordering, that is their main subscription

thing. But then the other two on a per transaction basis. So they kind of have a dual revenue structure there. And 71% of their customers used all three products versus 44% in 2019. So really these restaurants are relying on Olo for more than just mobile orders. I mean, that's sort of the bread and butter, but the average contract length is about three years. And if you're thinking, wow, this probably saw a massive boost due to COVID. Yes, it did see growth. But remember that though there was a lot more off-premise orders, restaurant spend as a whole came down yeah uh a lot more people were buying groceries and shopping or uh just cooking at home so it kind of offset yeah it was like a tailwind and i had one um but a little bit about

the history ola was actually founded as go mobo in 2005 i kind of missed the old name uh by noah glass in new haven connecticut and it started as a mobile app that would allow users to make pre-orders by text message to coffee shops. But at the time, less than 5% of people had smartphones. So I guess that the market wasn't really there yet. I think no glass was pretty bullish on smartphones though. There's a lot of interviews with them. So feel free to look up those. In an interview, he said, I showed the idea to an angel investor who said, I believe in you. If you believe in this idea enough to quit your job and tell Harvard business school that you're not going to show up in the fall. I will give you half a million dollars to fund a launch of this

company. It was a no brainer for me. It felt like the right time in the world for this idea. So since that point, they've also been very capital efficient. They've raised less than a hundred million dollars since inception for reference. They are much larger than a hundred million dollars. So it's not like Uber. And they do like a hundred million in revenue. So, right. And they IPO less than a month ago. So that's kind of the background. Yeah. All right. Industry, landscape, competition. Consumer spend on restaurants is projected to hit about $1.1 trillion by 2024. Obviously, Olo's market here is a lot smaller than that because they're just a tiny subset of that spend. But they think they're at about $7 billion with their current market, which would be these chains that they're going after. But if they expend to all different types of restaurants, probably outside of fine dining, which we wouldn't really want this, that will hit to $40 billion. And I'm not sure if that's just in the U.S. or also international.

But either way, they're not really worried about the market opportunity as kind of a headwind for them. You might think, all right, well, this is just kind of a small part of the ordering process, but it is in such a large industry. and compared to their revenue numbers currently, they're not going to really run up into any saturation walls. Around half of consumers say instant and on-demand ordering for restaurants is important and that they will leave for another restaurant

if digital ordering is like a bad process. And I'm getting this from the S1. So obviously they were looking at studies to paint Olo in a good light, but that definitely rings true. Brad, you have anything on that? Yeah, all this is a good point to make. All this is from the S1,

But they did do a pretty darn good job of like here. This is from the National Restaurant Association. This is from another hospitality group. So they didn't source that much internally, which I really appreciated. And those numbers make I mean, they just make intuitive sense. Like we've all had. I think everyone has probably gone through that where you order from some place or you try to and the process is so bad that you're like, all right, I'm going to try somewhere else. yeah and the i mean i think i remember noah glass also saying that off-premise orders so stuff where you weren't there and eating in uh ended up i think making up a majority of the orders for restaurants prior to covid prior to covid yeah it doesn't seem right but it sounds like the growth was already there it was moving in the right direction 2020 you know being a little bit of stimulus i think but another interesting note that i didn't really know or would think And I think I tweeted this and a lot of people were like, nah, that doesn't make sense.

I'm like, I don't know. Look, the study. It's just the study. It's not my opinion. But apparently 64% of consumers prefer to order through first party. So something where you're like on, say, Chipotle's app instead of DoorDash or Uber Eats. What are your guys' thoughts on that? 100%.

Couldn't there be more? I absolutely hate. I think DoorDash and Grubhub are the dumbest apps. I hate the service. I hate them too. Brad, what are your thoughts? Yeah, I'm going to echo that. And also I really love supporting restaurants when I'm ordering food for

them. And, and if I know that if I'm ordering through them, they're going to make more, it's going to be more profitable sale for them. I'm probably not in the majority thinking that, but for me specifically, that that's a, that's a factor. Yeah. I'm also just worried. I'm worried. Like I'm worried either the menus are wrong or there's just too many moving parts with DoorDash involved. Usually when I go to like a direct apps solution,

I'm not really a delivery person anyways, but I don't know. It just feels like that supports the restaurant a little more than DoorDash, especially with all the articles you've seen where they have predatory pricing with some restaurants. Yeah, the 15% to 30% take rate, that's like all of some companies' operating margins, especially SMBs, which I guess Olo isn't really going after right now. So, I don't know. All right, anything else on this? Competitors, Chownow's competitors?

although or is a competitor excuse me uh they go after snbs with a similar offering to olo oh this could be a potential acquisition to enter that market there's slice which is going straight after pizza although that doesn't really make sense um feels like that silicon valley episode adjacent competitors doordash is about to be a direct competitor uh they are launching the white label product which i assume we're going to talk about on the second half of the show there's all the other food delivery services which aren't necessarily competitors but are adjacent to them there's square clover par technology wix toast they're kind of they work with olo and you could kind of maybe see them trying to go with a competing offering to them and for example you

can maybe make the argument square could buy olo and that would make a lot of sense uh but yeah i don't know yeah some of these point of sales providers uh like the point of sale system providers have stuff that kind of competes with it but at the same time olo gets bolted on to par technologies tablet like you can they're working together right now right so uh it's one of those partnerships frenemies kind of thing yeah all right brad do you have anything on management and ownership yes i do so back to noah glass he is 39 years old uh founder lad olo um he skipped we kind of went over this but just uh just to reiterate he skipped harvard business school after graduating from Yale to start Volo, so casual. He envisioned this company while he was

working as a pizza delivery boy. And he just, he was noticing all the things wrong with the process and that kind of spurred the interest in him doing it better. A little bit more about him, he is a trustee for the Culinary Institute of America. He, I know no one, I guess this isn't confirmed, but a lot of different sources say this. He coined the term Twitter, apparently. So we're talking about Square maybe buying him and Dorsey maybe getting involved and that there is a relationship there, interestingly enough. And this is my favorite fact about him. His mom is a cookbook writer. So he grew up around food, around food presentation. And yeah, so the COO's name is Matt Tucker. He's the former, he's a former LendingTree vice president. The CFO is

peter benavides he's the former director of finance at sony music and board of director highlights there are three of them to note the former shopify cfo ross jones danny meyer who also owns one percent of the company and for those of you who don't know he was the founder is the founder of union square as well as shake shack which is a large consumer of olo and then i'm going to butcher this pronunciation um zuhair washington i really apologize if i didn't pronounce that correctly, but she is an Expedia senior VP. And then going down to ownership. So we talked about how this is a very, very newly public company. So the owner ownership stats that we have are pre IPO. It's, it's pre, so we don't know how it really shakes out until we get an

audited filing from them showing their post merger or post IPO ownership. But, but I would assume it wouldn't be that different and that off from pre. So as of the pre-IPO ownership, Noah Glass owned 9% of the float. An investment bank called Rain Group, and specifically Brandon Gardner was the trustee of this ownership, owns 28% of the company. And David Frankel, who Noah calls his mentor, owns 10.7% of the company. And then in terms of institutional ownership, those are the institutions that have heavy ownership in the company right now. And we have to wait on Vanguard or black rock yeah just to start uh start their uh suction cup stuff and start buying up all the float huh i uh i wonder if uh the david frankel or noah's mentor is the guy that fronted the capital

at the start uh he did yeah yeah so so they've been um they've had a relationship for a very long time um and yeah and it seems like danny meyer is also um maybe not a mentor but i i do love the fact that the founder of ShakeShark owns 1% of the float and is on the board of directors. I like that, to see that. Yeah, it's a great advisor to have. All hit valuation, quick market cap, it's pretty volatile. So these numbers might be a bit off, but market cap when I was looking was about 4.2 billion, ticker is OLO. Enterprise value though, post IPO is probably closer to about 3.7 billion since they have a lot of cash post IPO. So I'd really look at that number. But either way, we're at a premium valuation here, EV to sales of 38,

EV to gross profit of 46. So that kind of shows if you look at those two numbers, gross profit is really strong, or sorry, gross margin is really strong. And then EV to operating income is north of 200. So, you know, premium valuation here, looks like they issue quite a bit of stock, nothing egregious, nothing that like Palantir levels like we were seeing, but we'll see more like a few quarters post IPO, kind of how their stock comp goes. And that's just kind of something you got to track. Don't think like, all right, they do stock comp, can't invest. You just kind of got to look, all right, how much is this going to impact my valuation estimates here?

Okay. I'll hit earnings. In 2020, Olo had 98 million in revenue that was growing 94% year over year. 6% of that though was professional services revenue. So that is like integration, you know, That's not stuff that's higher margin, but I would say I think 94% of it is their subscription stuff. Do you ignore that, Brad, or is that part of – Yeah, sort of, because it's the very beginning of a consumer relationship, so the revenue is a lot different and a lot less long-lasting than the subscription and transaction revenue they're racking up. Yeah. And if they are, hopefully that doesn't, that's like a front cost. So it's not like that's not as recurring. But the GMV in 2020 or the gross volume was $14.6 billion. They had 81% overall gross margins, but their platform revenue, so not the professional services, has 85% gross margins.

they had 16 million in operating income this year that's about an 18 percent operating margin about 20 million free cash flow they had a 120 percent net revenue retention rate their enterprise brand uh retention rate on average is 99 so that's low that's uh the brands with 50 or more locations that's strong that's really strong basically a number they and that is brad Just to add in, that's 91% of their total locations too. So that they're not just saying this small group of our clients we retain really well. That is most of their clients. And there was like a tiny bit of nuance to that stat.

I think it's people that have kept the mobile ordering solution. That's what the stat said. So some form of Olo's products. So maybe something had a portion of that had two modules or whatever. They peeled back to one. I don't know. But the people that have been with Olo stay with Olo. It's basically what that stat shows. Yeah. And that revenue retention rate will tell you kind of the, not pricing power, but a bit of churn and a bit of like revenue growth from existing customers too.

Yeah. And just more, there are probably more transactions because of COVID. So that probably helped the retention rate as well. Stock-based compensation as a percentage of revenue is about five percent so not too bad uh especially for a company that's young that's not dilution that it's just sbc as a percentage of revenue yep and then when you have to factor then you got to think about all right what sales multiple are they trading at so at this current price it's probably not going to be that dilutive but you have to remember when they do these it's just all estimates so it's like there's it's not locked in stone what your dilution is the share right stock options are but that that's something we really can't cover on the podcast before we hit the break we're going

to talk balance sheet and liquidity, Brad, what do you have? Sure. And then just a quick note on that 120% net revenue retention, for those of you who are interested in the company, I would continue cross-referencing that with percentage of people who are adapting three modules or if they add more modules, just to make sure that that retention isn't like Ryan is saying, people switching from two to one modules, but staying with two or going to three. And I think those two stats combined are really informative. But moving on to balance sheet and liquidity. So pristine is the word for this. Pre-IPO, they had 76 million in cash and virtually zero debt. As Ryan just mentioned, they're cash flow positive. They do have credit revolvers in

place for 35 million and 18.6 million of that has been drawn at an interest rate of the greater between 4.5% or the Pacific Western prime rate plus 20 bps. So getting back to finance there. So they, their interest expense for 2020 was $200,000. So there was really, I mean, the debt is, I don't want to say irrelevant, but it's very small. In the IPO, they raise north of $400 million. So as Brett was saying, the EV is 3.7 million, while the market caps 4.2, I have the same metrics myself so i so so yeah and then throughout the s1 they did hint at taking out debt or new revolvers but i mean most s1s do this so i think they just kind of have to say that if there's any chance in the future of them taking out debt or revolvers um but pristine is is the

name it is the is the uh adjective i would use for this balance sheet yeah and i i think they do have to say like we could possibly take out debt or whatever but now with 400 million dollars in cash from the ipo i don't imagine there's a whole lot of reason to yeah unless they're going to go after some new markets grow back to uh losing money i mean it seems like they should close out that debt too but either way it's not going to be that big of a bigger factor um all right we're that that closed out the first half um we're going to take an ad break and then get back to the second half cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to

worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back. Next up, we are going to talk competitive advantages. And now I think this one will be a bit different than when we talked about GoPro and we were kind of gasping at straws. We'll kick things off with Brad. What do you have here? I see the Olo private label, white label approach as a very strong competitive advantage. So most chains and users, as we said from these surveys, and I've looked around and there are several other surveys that

consider it, or that, I'm sorry, that verify it, want to order through a restaurant, not through a marketplace. And Olo is the one enabling these restaurants to realize that higher margin direct to consumer sale while plugging into every single delivery service provider and allowing them to compete for your business rather than just kind of accepting whatever fee they tell you they're charging at that point in time. And what else, or the other important thing that this does is it really gives the restaurants back control of their data, back control of their consumer data. So when DoorDash or Grubhub or Uber Eats are taking in these orders, they are predominantly not sharing these consumer insights with the restaurants. So they are keeping it for themselves

for the most part. And because of that, restaurants are making decisions that are less holistic and take less of an accurate bird's eye view approach of their business than they could. And Olo is giving them back their data, it's giving them back their brand, and it's giving them back their margins all through this private label approach. And we'll talk about DoorDash a little later, I think. But DoorDash is sort of flirting with this idea of adding in a private label product. But it's important to note that even when these restaurants are plugging into DoorDash's private label approach, they're still competing with DoorDash's marketplace. And they are still limiting themselves to the driver ecosystem, the delivery ecosystem that

DoorDash has. They're not gaining access to Uber Eats. They're not gaining access to Grubhub. They're not gaining access to Postmates or Deliveroo or any of those other things. So while it's private label, it still is more limiting than Olo. And I think Olo is the only pure private label player among these giant chains. There are smaller players that you were talking about that gives them this holistic control of their business. Yeah. That was a long pitch. I'm sorry. No, it's okay.

And we can talk about the DoorDash part now, but it's like Olo provides the restaurants a lot of control, whereas DoorDash, I feel like, is fighting its stakeholders at every corner. You see with Uber, they had to raise a $250 million fund to convince people, incentivize people to work for them. And that's just on the driver's side, too. Sorry, that's a little different. Go ahead, Brad. yeah sorry to interrupt and this should have been the first thing i said in the episode but i own shares of olo and i'm a bull and love the company so yeah full disclosure full disclosure we're covered we we got the disclosure uh at the end but no yeah we should yeah so just know that i

like the company a lot as i'm saying nice things about it yeah you're right i just don't see why uh a restaurant would choose to go exclusively exclusively with doordash and shut off from the dispatch uh module that olo provides where you can pick the delivery service that you want but i'll get to my competitive advantage that's that it's scalable across multiple locations so it's really it is hard for me not being on the restaurant side to distinguish where the competitive advantage is in there like why it's so hard to get something that scales across multiple locations but uh wix has speedy tab they made that acquisition that's like digital ordering uh square offers digital ordering services but those are meant for like mom and

pop shops and they're meant to be individual not scalable so i was trying to look for stuff and i guess one guy on reddit uh which don't get all your analysis on no that's good that's a deep dive research right there really in uh he's and this had like 425 000 likes so that'll validate it but uh he said nobody with a brain would use square out a real business their processing rates are egregiously high and the functionality of their register is far inferior to other options interesting maybe not the terminology i'd use but the uh it's i i think it is designed for people those solutions are designed for individual stores and i mean these big natural national chains and sometimes international chains they need something that can be applied to multiple locations and olo

seems like the only one that's really providing that yeah i don't know why you know more maybe do you have any other insights on that or is that correct um yeah you guys think you guys know more than you're giving yourselves credit for that that's pretty accurate to me all right i'll hit mine uh switching costs uh i took the easy one here as long as the product stays good there's no reason to leave we see that in those churn numbers they gave out that you know may have been a little biased but uh and then also in that net retention rate um you know and during like so over the last five years and probably over the next 10 or maybe only five there's this big change in restaurants where like if you saw like after say even like world war ii we had basically

the way that restaurants were done up until like 2000 2010 there's this big change where we're and all these platforms and stuff like that, and everything's going to shift out, it's really important to grab customers because you could have these restaurants as a customer for the next decade and beyond, or maybe even 20 or 30 years where people think of it, all right, the industry is super dynamic right now. A lot of things are changing, digital ordering, pickup, delivery, all that stuff. But eventually, things are going to normalize for whoever wins out or what the consumers want when that happens it's going to be important to grab market share and when they do i would

think there's high switching costs with a product like holo yeah and i think that's proven in the retention rate yeah uh future growth opportunities brad you want to go first yeah i'm gonna split mine into two uh so the first one part of that rails product that they rolled out is a is a google partnership so with that google partnership and rails and the transactional revenue they're going to collect, it's really important to note that Olo is already signed on with 50% of the fastest growing private market chain restaurants in the United States. So as these restaurants grow and as they expand nationally, that's going to be a very powerful revenue driver. And then B is another future growth opportunity of their on-premise serve product. So this is a subset

of ordering in which they have, this is not unique, but they're building it out to kind of create more of a holistic product offering, but they're trying to eliminate menus and they're trying to eliminate as many touch points as they can on from, from the in-person dining point of view. So you'll take your phone and you'll scan a QR code on a table. I've actually done this at a few restaurants and I asked them and it was recent. They said, yeah, it's Olo. So that was cool for me because I'm a stock. And so, yeah, that on-premise business, while some of these other products may see some headwinds from a reopening and a normalization that will see some tailwinds from a reopening and a normalization so that will be interesting to keep an eye on

okay ryan yeah um so i guess it's hard like they serve such a specific function that it's hard to come up with a whole bunch of future growth opportunities uh but they the ones that they mentioned on their s1 both of these were mentioned there uh a lot of their brands that they service are uh international brands global brands um i guess maybe there's some applebee's in mexico or whatever you know jimmy john's abroad so uh selling to those international chains uh is another way they can expand they said they intend on doing that hopefully and then other verticals so grocery stores convenience stores uh they mentioned that they could benefit from this technology as well you think about the uh curbside pickup or you know groceries are really starting

to rule out that stuff even though i think it's pointless um but some people like those curbside pickup things so uh just maybe moving into those avenues as well yeah it makes sense yeah what about you uh i took smb's so that's small medium-sized businesses they highlight this a bit as something that might be two to three years out but is not in their current product offering they're only going after those larger places so the ordering process at a lot of these restaurants can be difficult it's typically not the greatest experience uh so i think there's an opportunity there they don't have as much to spend there's higher bankruptcy rates there um you know they're not going to have as much cash they're like all right well we already use square we already use

clover or whatever we're just going to go with our current process so it might be tougher for to get into that market they might have to spend more on marketing um but i don't know what do you guys think do they have a chance to get into the small and medium-sized business i think it's easier to go that way than it is to move to larger businesses from smaller businesses yeah i think it's easier to go backwards than to try and scale out across multiple locations but i also don't know that that's not an area or a side that i would know i feel like that's more like restaurant operators probably understand that better yeah brad i just think their their value is really uniform tech integration across tons and tons of of locations that are that don't traditionally do

a great job communicating with each other so they i do see smb as an avenue for growth but they'll have to kind of recreate a value prop um with uh with with the um economically efficient ordering or with the economically efficient delivering um being able to price compete or price match but i i don't see the the real the real like value creation of the integration as is that strong here perhaps i think the module that applies across any size restaurant is probably the dispatch like managing who you pick as your delivery service provider so maybe start with that as you're in road uh i imagine they already have their i imagine the point of sales provider for the smb has already had some sort of forwarding solution yeah yeah it's hard to tell i'll say i

don't know i don't know on that one all right highlights and low whites brad uh keep things on yeah just to repeat i own the stock so um i'm gonna say nice things and just know i own the stock uh my my highlight is the business model so i love the delivery space but i hate the actual economics of delivering. And what this company does is allows me to gain exposure to things moving a lot more than they used to and a lot more quickly than they used to without giving myself exposure to these delivery drivers that aren't super profitable for these marketplaces. So I do love the business model and it shows in the fact that they are growing at nearly 100% year over year and they're putting out free cash flow. So that is not, I would venture to guess

that that's not on purpose, that they're making free cash. I would hope that they're really sinking their teeth into growth at this phase in the game. But I mean, that's just not something you see very often. And it was very encouraging. And what this did, I think, is allow them to get to their IPO while only raising 100 million in cash. And it allowed them to go public while having this pristine balance sheet, which I now, and then they hinted at this in their S1, see them taking that firepower and really, they didn't tell us what this is going to be, but they kind of flirted with it a lot, but seeing how they can replace some of the delivery service providers that they rely on so heavily in the delivery process. So my guess on what that means is as

good as yours, but I'm excited to see what all this flexibility that the business model creates will allow them to do. And then that kind of transitions pretty well into the low light, which is they got 19.3, I think, or something like that percent of their revenue from DoorDash in 2020. So there's not no customer or concentration risk here. DoorDash is very much so an integral part of their business. And despite the fact that they do plug into eight delivery service providers, DoorDash is the largest. So DoorDash saying, we're not going to let you take orders on our behalf. I don't see that happening just based on the fact of how many giant chains that Olo already serves and and how the restaurants are sort of in control and they

are more and more shifting to Olo and I think DoorDash is just kind of going to kind of have to deal with that you can take that with a grain of salt because again I do really like the company but DoorDash it is a threat and and while I don't see it as preventing Olo's growth going forward or their success it definitely could could that could change and I'll be keeping an eye on it for sure it yeah i i mean we saw that uh lawsuit thing come out but it's so weird that that was uh yeah at least like it felt like some someone that just wanted to buy the dip was like let's let's release an article or door i mean yeah it seems like doordash might have released it too brad what do you what are you yeah so this is from 2018 um the the feud and then between doordash

and Olo and DoorDash saying you charged us $7 million too much over the course of our contract, which has been four years. So it's really, in terms of the impact it could have on what the income statement looks like right now in their S-1 in the balance sheet, it's going to have no impact. And this sounds kind of weird, but I'm almost more concerned about the fact that Olo has to spend money on legal fees and has to divert some of their attention to this feud, more so than the result of the lawsuit, if that makes sense, because it's a young growth company and I want them focusing completely on growth right now. Yeah, that can bog them down. Yeah. It's almost, it's a good case study in customer concentration risk because you always see

people go, well, you know, they have so much revenue from one customer, what if something happens? And it's like, this is a testament to the platform because whatever, let's say you've off DoorDash, they can't leave your additional volume to their platform. And right now, it seems like that's a business or a stock that rides on revenue growth. So yeah, what are your thoughts on big chains going exclusive with delivery partners? I know Chipotle is like exclusive with DoorDash. Is that a concern at all? Yeah, and I almost think it's more. yeah i mean it's definitely a concern and i shouldn't i shouldn't i shouldn't um dismiss the competitive landscape because there is a lot of competition here i just i just look at all the

the chains that they're racking up and that to me that that's that's the proof i need to to know that you're really delivering for their users they might not go for the highest dominoes probably won't use them because they can just build something custom yeah chipotle is interesting and Domino's as well because they built that stuff in-house. Or most of their ordering service. Like KFC and whoever. What does Yum own?

That group of... Is that Domino's? No, that's not Domino's. It's Taco Bell, Pizza Hut, KFC. Yeah, there you go. All right. Well, I'll have my highlights. They do have a lot of big name customers,

which is validating. Not only that, like, hey, this is a platform that's real, but that these were big enough chains, in my opinion, that could have spent some money to build it in-house and it was good enough for them to say, all right, we'll just stick with Olo. I really like management. I think the business has good economics and I've used Sweetgreen's mobile ordering service and I think the product's actually great. My lowlights though, and this might come off as a little bit odd, But I sort of find myself questioning the addressable market because right now they have 400 brands.

If you don't have some sort of digital ordering service by now as a big chain, I feel like you have to have something. So that isn't to say they can't steal more, they can't get more customers, but it's going to be a little more costly to do so if you have to steal them away from an existing product. The other part is they talk about cross-selling or upselling as an opportunity, but 71% of our customers already have all three modules. They might go to more than three modules in the future, but I understand what you're... That's where my concerns lie. But I would also say there's that quote, good management always finds a way to expand their TAM.

I like Noah Glass. I think he can find new ways to grow. Yeah, as you consider the TAM too, the top 10 brands probably aren't going to ever use them maybe they will um so that's also like not like you can't think right they're gonna get mcdonald's someday it's probably not happening yeah all right i'll hit my yeah my highlights high margin high switching costs i think there is a clear path to growth now you might worry about yeah they're not going to grow 100 every year from here but i do think there is a clear path to grow so that nothing to say low lights i do worry about the competitive landscape from someone

like i mean this may have just been my initial thoughts but someone like square stepping in and competing with them they already have the inroads i mean we saw that reddit thing from ryan but i do think that they do square or someone like them has potential it could be clover too to put in a competitor maybe on this guy here but i'm not sure i think it's also a tough industry to operate in there's a lot of capital going after the growth um and doordash has a history of going basically like, quote, scorched earth here and forcing everyone to start losing money.

So when they launched the white label product, that gives me a bit scared because DoorDash is not afraid to basically kill everyone, including themselves. And like, you know, everyone loses money. Great, we win. But it will be a solid test

to Olo's product in mode. And over the next few years, if Olo is still doing well, that is a testament to their competitive advantage, if they have. I think Dan McMurtry once said that the food delivery industry is like a bunch of people swimming or floating miles offshore trying to kill each other.

Yeah. Like, Oh, you died first, but they're still floating miles offshore. So yes. Yeah. Almost the post-connicts. I don't know. Brad, anything else before we get some more or less interested? No, I think that pretty much covered everything.

All right. Well, bro, let's wrap things up more or less interested. Brad, I think we know your answer because you own it already, but interested to hear your thoughts. Yeah. So I should be a little more specific about how I plan on investing in this company because I do own a little bit and I love the business, but sort of oddly, I'm finding myself rooting against the stock currently because it is expensive and there's really no way around the fact that it's expensive today. It is a new IPO and IPOs normally have a really fun way of giving us juicy opportunities to add more to companies we love. So I do own, I think like

30 or 40% of what I want overall in the company, maybe closer to 50. Now I added a little bit, but I'm very much so looking for stock price weakness in order to add to my position. I'm very interested in this company. I'm going to own it for a long time, but uh i'm expecting the stock to be extremely volatile for the time being and we'll look to take advantage of that okay ryan more interested um i really the business checks all the boxes management checks all the boxes um there wasn't any big flaws for me the only thing with like you know we talk about valuation and it's it's usually a good sign when the only knock on a business is valuation but with that said like even if you you could love the business

more than anything in the world and you can still be wrong that's why it's good to have a margin of safety and we why we look for cheaper valuations right now it's keeping me away uh it's on the watch list so it's not like something that'll go on there it is on the watch list i'm waiting yeah i put it i uh i put it on my watch list as well so more interest i literally put it on the watch list more interested but uh on the watch list for now yeah i i'll i'll reiterate that i Honestly, I hope it gets cut in half. I don't know. I hope the stock gets cut in half because that would make it a lot more appealing.

The business looks great. Yeah, nothing else to say. I don't know. We'll see if they can execute. Brad, what's your stock for next week? Yeah, so we voted between Olo and Coursera last week, so let's do Coursera for next week. Yes. All right, good.

Good stuff. I like that one. Yeah, that's interesting. Education tech? I don't even know what it does. It's education tech. I've taken a class with it before. It was pretty, it was, it was basically a YouTube video, but I don't know.

It was good. I got my real estate license, I think, or something from there or maybe real estate express or I don't know. But it's a cool company and excited to check it out. Yeah. All right. Well, that's going to do it for this episode. Thank you guys for listening.

Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners in Arch Capital. Arch Capital may hold securities discussed in this podcast. Thank you all for listening. We'll see you next week.