Olo is a software-as-a-service platform for multi-location restaurants in the United States. The Olo platform enables on-demand commerce operations covering digital ordering and delivery via online and mobile ordering modules. These modules include:
Order Management- An on-demand digital commerce and channel management solution that allows consumers to order directly and
Delivery Enablement- A network aggregator that lets restaurants offer, manage, and expand direct delivery. Here, restaurants can control and syndicate menus, pricing, location data, and availability. They can also directly integrate and optimize orders from third parties into point of sale and systems.
Why is Olo stock down 80% from record highs?
Olo stock is valued at a market cap of $1.27 billion. The company went public in March 2021 and touched a record high of $45 last August. Currently, Olo stock price has fallen to $7.87, which is almost 80% below all-time highs.
The decline in Olo share price can be attributed to several factors, including a challenging macro environment. The United States is wrestling with rising commodity prices and inflation which is at 40-year highs.
To offset an inflationary environment, the U.S. Federal Reserve has increased interest rates multiple times in 2022. So, the double whammy of inflation and higher interest rates will most likely lower consumer demand and compress corporate earnings in the next year. In fact, several experts also expect a recession to hit global markets in 2023.
Is Olo a good stock to buy?
Olo aims to solve a few technical challenges faced by restaurants in terms of digital ordering. Most restaurants lack the technical expertise required to scale online ordering operations, resulting in lower customer engagement. So, Olo is looking to simplify the processes ranging from ordering to drive-thru and delivery.
Over 600 brands and 82,000 locations use Olo tools. Between 2018 and 2021, its sales have increased at an annual rate of 67%, while locations have grown by 31% annually in this period.
Olo is optimistic it can expand its business by 100x on the back of an aggressive customer onboarding plan. As digital orders gain pace and account for a larger portion of the overall sales mix, they should earn additional revenue per digital order.
Olo’s management also believes its share is undervalued after the recent sell-off. The company just authorized a repurchase plan of $100 million which is almost 8% of the total shares outstanding.
While Olo’s sales have risen from $31.79 million in 2018 to $149.36 million in 2021, its operating losses have widened from $8.78 million to $28 million in this period. A key reason for the decline in Olo stock price in the last year is its consistent losses.
The bear case for OLO stock price
To offset its cash burn rate, Olo might have to raise equity or debt capital. Investors should understand equity capital dilutes existing shareholder wealth while debt needs to be serviced via regular interest payments.
Olo’s cash balance stood at the end of Q2 stood at $460 million, which provides the company with enough room to improve the bottom line. In the first six months of 2022, Olo’s operating expenses doubled year over year while sales were up just 23%.
In the last 12 months, Olo has reported a net loss of $36 million, indicating a negative margin of 22%. Its free cash flow is also negative, and it burnt close to $7 million in the last four quarters, indicating its liquidity position is robust.
Olo is forecast to increase sales by 22.7% to $183.2 million in 2022 and by 20.5% to $221 million in 2023. But its adjusted earnings are forecast to narrow from $0.12 per share in 2021 to $0.07 per share in 2023.
OLO stock is valued at 7.2 times forward sales and 200 times forward earnings, which is quite steep. So, there is a good chance for OLO stock price to move lower if market sentiment remains bearish.
The final takeaway
Olo’s success story can be credited to its unique sales strategy. It targets enterprises and sells services to them at the corporate level. So, once the headquarters are on-board, all other locations follow suit.
This strategy allows Olo to limit its marketing spending. For example, marketing expenses accounted for 20% of total revenue, allowing it to allocate 38% towards research and development.
Due to its high growth and robust adoption, Olo’s sales model seems a hit. Further, its multi-channel offering could allow restaurant chains to increase usage of the company’s services, which suggests Olo could easily expand new and existing chains.
Despite its steep valuation, OLO stock is trading at a discount to consensus price target estimates. Wall Street expects Olo stock price to surge by more than 50% in the next 12 months.