- Shares of EverQuote sank ~10% after reporting Q2 results, despite a print that beat Wall Street's expectations on the top and bottom lines.
- This is the second quarter in a row that EverQuote is down after strong results. Year to date, EverQuote is down ~30%.
- The company managed to accelerate revenue growth to 34% y/y in Q2, on top of a mid-single digit adjusted EBITDA margin.
- Trading at less than <2x forward revenue, EverQuote is a prime opportunity to invest in value in an otherwise expensive market.
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Over the past year, shares of EverQuote (NASDAQ:EVER) have seemingly known how to go in only one direction: down. The Massachusetts-based insurance company, best known for attempting to give consumers a more transparent and digital-first experience in getting and comparing quotes for car insurance, has been plagued by weak sentiment this year, even though the company has continued to put up solid execution.
EverQuote just reported second-quarter results, and has been typical for this company over the past year, the stock dropped ~10% as a result. On the whole, the company's Q2 print exceeded expectations on the top and bottom line. The company announced an acquisition of a company called PolicyFuel which will extend its capabilities in direct-to-consumer insurance policy sales. The only potential black mark was the fact that EverQuote took down its full-year adjusted EBITDA guidance - but that corresponded to an increase in full-year growth, as the company has decided to invest in more agents to drive growth during the fourth quarter's open enrollment period for healthcare plans.
Year to date, shares of EverQuote have extended losses and are down ~30% since the start of January:
I'll be the first to admit that investing in EverQuote requires a lot of patience. Sentiment and actual results never seem to go hand-in-hand. I do take comfort in an old Buffett mantra, however: that in the short term, the market is a voting machine (and voting against EverQuote), but in the long term, it's a weighing machine. And what I see in EverQuote is a very modestly valued growth stock that is also notching impressive gains in profitability.
Here's a refresher on the bullish thesis for EverQuote:
- EverQuote is being very intentional about driving new category growth. Non-auto verticals are growing faster than auto and represent huge market opportunities. EverQuote has set up growth initiatives in the home/renters, life, health, and commercial insurance verticals. This ensures that EverQuote's future lies far beyond auto. Its recent acquisition of PolicyFuel, a "policy sales as a service" or "PSaaS" company, extends its focus on direct-to-consumer insurance sales.
- Strong car sales are also driving heightened auto insurance demand. Auto insurance (EverQuote's biggest product by far) is an "aftermarket" product, and one that tends to see strong correlation to the volume of car sales. Car sales, meanwhile, are reaching a hot peak in the U.S., driven by the suburban sprawl and the desire for road trips in the absence of flying.
- Ability to turn on and off growth depending on market conditions. EverQuote's business model relies on spending variable marketing dollars to pull in traffic and generate leads for its insurance partners. As such, when times are rough, EverQuote can quickly pull back on its largest category of spending (customer acquisition) and focus on cash preservation. When times are good, EverQuote can step on the growth pedal to drive more policy sales. In more recent quarters, EverQuote's efficiency has improved and its adjusted EBITDA and variable margin metrics have soared.
- No insurance risk. Companies like Lemonade have captured virtually all the attention in the insur-tech space, but I prefer EverQuote for the fact that it's just a third-party marketplace that incurs no risk of loss.
EVER Stock Valuation checkup
Deep value, meanwhile, is the cornerstone appeal for EverQuote. At current share prices near $27, EverQuote trades at a market cap of $778 million. After we net off the $54 million of cash on the company's most recent balance sheet, EverQuote's resulting enterprise value is $724 million.
For the current fiscal year, meanwhile, EverQuote has guided to $440-$446 million in revenue, representing 28% y/y growth and showing two points of upside versus its prior outlook of 26% y/y growth (at the same time, EverQuote has nudged down its adjusted EBITDA guidance for the year by ~$3 million, due to its updated growth plans).
This gives EverQuote a valuation of just 1.6x EV/FY21 revenue. We note as well that EverQuote is close to being valued on an adjusted EBITDA basis as well. For next year, Wall Street analysts are projecting consensus revenue of $522.5 million for the company (+18% y/y versus the midpoint of this year's guidance range). Let's assume EverQuote can notch a 10% adjusted EBITDA margin on this revenue ($52.2 million in adjusted EBITDA) - which is higher than EverQuote's current 6.3% adjusted EBITDA margin in its most recent quarter, but this year is also an investment year for EverQuote and longer term, it should be able to notch double-digit margins. At a ~10% adjusted EBITDA margin, this would put EverQuote's valuation at ~13.8x next year's adjusted EBITDA.
At a time when the S&P 500 is treading all-time highs at ~4,400 and the entirety of the tech sector is trading at record valuations, I view low-momentum value plays like EverQuote to be essential buffers in my portfolio. Be patient here and stay long.
EverQuote Q2 download
Let's now peel back some of the details behind EverQuote's latest Q2 results. Take a look at the Q2 earnings summary below:
EverQuote's revenue grew 34% y/y to $105.1 million in the quarter, well outpacing Wall Street's $102.3 million (+31% y/y) expectations. We note as well that EverQuote achieved a six-point acceleration relative to 28% y/y growth in Q1. Additionally, in my view EverQuote's Q3 guidance which calls for just 22% y/y growth is quite conservative considering where the company's growth has landed over the past several quarters: which, to me, sets a low bar for EverQuote to cross in Q3.
By category, EverQuote's growth was pretty evenly distributed, with auto insurance (82% of EverQuote's overall revenue) growing at a 34% y/y pace and its other categories growing 36% y/y, as shown in the table below:
Part of the moderation that EverQuote seems to be suggesting for Q3 and beyond could be attributed to the company's view that insurance carriers will be less aggressive about signing on new customers in the second half of 2021. The company still notes, however, that it expects consumer demand and traffic levels to be elevated. Per CFO John Wagner's prepared remarks on the Q2 earnings call:
Looking ahead to Q3, we anticipate some moderation in carrier demand for acquisition of new insurance consumers, but we believe we will maintain much of the improvement we have made in monetization. We expect revenue per quote request to moderate slightly in Q3 from Q2’s record levels, while continuing to grow modestly on a year-over-year basis.
We also expect the volume of consumers coming to our marketplace to emerge as a significant driver of revenue with an expected mid-teens year-over-year growth rate in quote requests in Q3. This is consistent with our expectations expressed in prior remarks that we believe consumer volume and monetization will both contribute to our year-over-year growth in the second half of 2021."
Importantly, EverQuote continues to grow in a sustainable manner. Its variable marketing margin - which is the measure of EverQuote's revenue net of customer acquisition expenses - grew at a 40% y/y pace, while its VMM as a percentage of revenue expanded to 31% in Q2, up from 30% in the year-ago quarter.
Similarly, EverQuote's adjusted EBITDA rocketed up to $6.6 million, growing 65% y/y and representing a 6.3% adjusted EBITDA margin, 120bps richer than 5.2% in 2Q20. The company's -$0.07 EPS also came in well ahead of Wall Street's -$0.10 expectations.
Key takeaways - Is EverQuote Stock A Buy?
I view very few red flags that would warrant a ~10% dip in EverQuote post-Q2. While it's true that the company is pointing to potential deceleration in Q3 as a result of softer insurance carrier marketing aggression, and that increased internet advertising prices may have some near-term headwind to EverQuote's VMM/advertising costs, I think EverQuote's <2x forward revenue multiple already captures in all of that risk. Stay long here and buy the dip.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of EVER either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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