Olo SaaS Stock Analysis
We look at a profitable, high growth SaaS business in the restaurant industry that is off to a great start and has a long runway for further growth
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Industry Overview
No one needs an introduction to the restaurant industry, but running a restaurant as a modern digital business is an incredibly difficult and complex endeavor primarily due to COVID-19 challenges and restrictions, consumers demand for “food as a service”, digital, simple, and personalized experience. The nearly $700 billion restaurant market in the United States continues to be one of the most underpenetrated in terms of on-demand commerce. Restaurants are uniquely positioned to benefit from consumers’ demand for digital convenience but are limited by significant complexities in the restaurant ecosystem, which have slowed penetration to date. Digital restaurant ordering is experiencing rapid growth in a shifting landscape. Aggregators(doordash) created consumer applications to meet the growing demand for convenient restaurant food, helping expand off-premise dining. In addition, major consumer-facing platforms are embedding food ordering into products such as maps and search results, making it even more convenient for consumers to place orders from their favorite restaurant brands. Like any other retailer, understanding and owning the consumer relationship is vital to restaurants as it allows them to better analyze interactions, customize offerings, and maximize the long-term value of their consumers. However, restaurants risk losing direct consumer relationships if they are heavily reliant on aggregators, which generally do not provide visibility into who is ordering or enable a restaurant to articulate its unique brand value. Additionally, aggregators typically limit a restaurant’s ability to collect and use data about consumers and orders transacted through the aggregator. Consumers also value this direct and personal connectivity with restaurant brands. Also, restaurants currently have to deal with inconsistent technologies within and across brand locations, multiple platforms & integrations within a restaurant, numerous, highly modifiable menu items, multiple ordering channels, and complex, on-demand logistics management.
Business Overview
OLO provides a leading on-demand commerce platform designed for multi-location restaurant brands to create unique direct-to-consumer digital ordering experiences, manage orders across channels, and enable delivery across their restaurant locations. OLO is an open SaaS platform that integrates with technology solutions throughout the restaurant ecosystem, including most POS systems, aggregators, DSPs, payment processors, UI and UX providers, and loyalty programs. OLO provides restaurants with a centralized system to manage their digital business and ensure consumers receive better, faster, and more personalized service while increasing restaurant order volume and improving yield at a lower cost.
Olo and the Restaurant Industry
Olo is one of the largest technology ecosystems in the restaurant industry. It integrates with over 100 technology partners and is the only party able to unify and enhance the utility of disparate technologies across the industry, including POS systems, aggregators, DSPs, payment processors, UI and UX providers, and loyalty programs. Olo is building this two-sided network, comprised of restaurants and technology partners, which has made them valuable and deeply embedded within the restaurant industry.
OLO’s platform includes the following core modules:
Ordering
Ordering is a secure, white-label, direct-to-consumer, front-end solution that enables consumers to directly order from and pay restaurants via mobile, web, kiosk, car, voice, and other digital channels. It integrates with customers’ back-end systems and provides a scalable digital ordering infrastructure behind custom front-end applications.
Dispatch
Dispatch enables restaurants to offer and expand delivery for orders generated via their own websites and applications. It also manages each restaurant’s delivery options and selects DSPs, including in-house couriers, based on optimal price, timing, availability, and other attributes.
Rails
Rails centralizes and manages the location-specific menu, pricing, and availability, enabling automatic updates across multiple ordering channels. It integrates orders from aggregators into a restaurant’s POS systems.
Olo’s benefits to restaurant operators
Olo is a centralized source of data - Customers, many of whom leverage multiple technology providers across locations, can manage menus, including menu-item availability, and day-to-day operations with permission-based administration tools and reporting, utilize Olo as a centralized source of data.
Olo integrates with over 100 restaurant technology solutions across the restaurant ecosystem which streamline order processing and fulfillment and keep information in sync with a variety of POS systems, aggregators, DSPs, payment processors, UX and UI providers, and loyalty programs.
Olo consolidates demand across aggregators, allowing customers to generate more orders through an intuitive, coordinated system. They are able to monitor and parallel process orders across the various channels and more easily and accurately prioritize and fulfill orders. They can also optimize yield during peak periods by prioritizing different ordering channels as needed to ensure the highest priority items are fulfilled while maximizing profitability.
Enable and manage a restaurant’s delivery functions across providers. Olo’s Dispatch module enables restaurants to automatically select the optimal delivery provider for an individual order based on dozens of attributes, such as delivery time, order size or value, cost of delivery, or service level, for each individual order at each individual location. Restaurant brands are able to fulfill orders just-in-time to allow for a better consumer experience at a competitive cost. Enhance and Own the Consumer Experience
Olo enables restaurants to provide individually branded and direct-to-consumer experiences across devices through web and mobile front-end or via customized consumer experiences using APIs and third-party UI and UX providers. This unique consumer experience extends beyond aesthetic and operative functionality to expanded order offerings like upsell, group ordering, and loyalty programs.
Olo enables customers to collect a significant amount of data that they can use to generate valuable insights into their consumers’ ordering behaviors. Restaurant brands and their individual locations can leverage this data to better manage operations, provide consumers with a more personalized experience, and drive incremental sales.
Olo is SaaS and is highly flexible with the ability to handle large spikes in traffic and withstand many failure scenarios. Olo platform currently handles, on average, nearly 2 million orders per day.
Olo Business Model
Olo’s business model includes both subscription and transaction-based revenue streams. This hybrid pricing model provides Olo with a predictable revenue stream and enables them to further grow revenue as customers increase their digital order volume. Olo generates subscription revenue from the Ordering module and transaction revenue from the Rails and Dispatch modules. Olo charges a fixed monthly subscription fee per restaurant location for the Ordering module. Customers who use the Rails and Dispatch modules pay a fee on a per-transaction basis. Olo also charges aggregators, channel partners, and other service providers in the ecosystem on a per transaction basis for access to Rails and Dispatch modules. The Network module, which allows brands to take orders from non-marketplace digital channels (e.g., Google Food Ordering, which enables restaurants to fulfill orders directly through Google search results and Maps pages) generates fees predominantly through revenue sharing agreements with partners.
Olo TAM
Olo’s total addressable market opportunity is $7 billion in the United States. This figure only includes enterprise restaurant locations. This figure is determined by using the number of enterprise restaurant locations and the number of orders that Olo generates revenue from on a per-location basis.
Olo Growth Strategies
Add new large multi-location and high-growth restaurant brands and scale with them. Olo has historically pursued and will continue to target the most well-capitalized, fastest-growing restaurant brands in the industry.
Upsell existing customers additional modules. As of December 31, 2020, 71% of Olo’s customers used all three modules. Olo is well-positioned to upsell to their remaining customers.
Olo thinks there is an opportunity to increase their share of the transaction volume through direct channels and revenues from aggregators.
Olo intends to continue to invest in expanding the functionality of their current platform and broadening capabilities that address new opportunities, particularly around payments, on-premise dining, and data analytics.
Olo plans to expand its current ecosystem of developers, user experience designers, and other partners to better support their customers, attract new customers and strengthen their competitive position.
Olo believes there is an opportunity to partner with SMB brands to enable their on-demand commerce presence. Also, there is a robust opportunity to expand their usage of Olo outside of the United States.
Business Risks
Olo’s growth depends in part on the success of their strategic relationships with third parties and their ability to integrate with third-party applications and software. Olo’s Dispatch module currently relies on a limited number of DSPs. Olo’s Rails module currently relies on a limited number of aggregators. Olo currently generates significant revenue from their largest restaurant customers, and the loss or decline in revenue from any of these customers could harm Olo’s business, results of operations and financial condition. The dual-class structure of Olo’s common stock will have the effect of concentrating voting control with their existing stockholders, executive officers, directors, and their affiliates, which will limit non-voting shareholder’s ability to influence the outcome of important transactions and to influence corporate governance matters, such as electing directors, and to approve material mergers, acquisitions, or other business combination transactions that may not be aligned with their interests.
Key SaaS/Financial Metrics
Enterprise Restaurant Locations TAM - $7B
Total Revenues - $98.4M 2020 and guidance for 2021 is $140M
Revenue Growth - 42% (Based on management guidance from 2021 and actual 2020 revenues)
Subscription Revenues as part of total revenues - 56.7% for 2020
Commerce/Transactional Revenues as part of total revenues - 43.3% for 2020
Gross Margin - 81%
Free Cash Flow as part of Total revenues - 21%
Net Expansion Rate - 120%+
Rule of 40 - 50%+ (42% growth + 21% FCF)
Payments/Transactions GMV - $14.6B
Customers using OLO - 400+ brands at 64K+ locations
Final Thoughts
Olo is a profitable SaaS platform that primarily enables enterprise restaurants to digitize their business, simplify their operations and provide analytics on their own customer data. Their strategy of building a network effect of integrations with partners and platforms gives them a sustainable narrow moat which will just keep increasing as they add more services to their platform. Their metrics from IPO and the recent quarter look compelling and they still have a long runway for growth.