SLQT - EverQuote Awaits Auto Insurance Industry Normalization

2023-12-14 13:56:43 ET

Summary

• EverQuote, Inc. operates an online insurance shopping platform and provides lead-generation services for insurance carriers and agents.
• The global Insurtech market is projected to reach $161 billion by 2030, driving the need for insurance industry transformation.
• EverQuote's recent financial trends show a drop in revenue and negative operating income.
• Given the firm's reliance on the auto insurance industry, which has been performing poorly, my outlook remains Neutral [Hold] on EverQuote, Inc.

A Quick Take On EverQuote

EverQuote, Inc. (EVER) operates a platform that enables online insurance shopping for consumers and provides lead generation for insurance carriers and agents.

EverQuote went public in June 2018, pricing its IPO at $18.00 per share.

I previously wrote about EVER with a Hold outlook in September 2023 due to the continuing auto insurance industry downturn.

Until we see durable signs of auto insurance industry normalization and growth, I remain Neutral [Hold] on EverQuote, Inc. shares.

EverQuote Overview And Market

Established in 2008, EverQuote has developed services that simplify insurance shopping and make it more personalized while saving time and money for both consumers and providing lead generation to insurance providers.

The firm is led by Chief Executive Officer Jayme Mendal, who joined the company in 2017 after serving as Vice President of Sales at PowerAdvocate.

EverQuote connects insurance consumers to insurance carriers across various insurance types, including auto, home, renters, and life insurance.

Management says that identifying suitable insurance products can be challenging for individuals due to limited online choices, pricing disparities, and an abundance of complex coverage options.

As the company attracts more customers, it gathers more data to enhance personalization, conversion rates, and client satisfaction. An increased number of providers also helps to draw more consumers and contributes to data collection.

The firm advertises its services via numerous online channels such as search engines, email marketing, social media platforms, and display ads.

A 2023 market research report by Grand View Research estimated that the global Insurtech market (as a proxy for the insurance lead gen market) was valued at $5.45 billion in 2022 and is projected to reach $161 billion by 2030 - with a very high CAGR of 52.7% during the forecast period (2023 - 2030).

The main reason behind this expected market growth is the need to transform the insurance industry to cater to a broader customer base, including high-net-worth individuals [HNWIs], upper-middle-income groups, and lower-middle-income groups.

Insurance firms are expected to both improve their offerings and form strategic alliances with financial technology innovators to deliver innovative payment solutions to clients.

The growth trajectory of the U.S. Insurtech market from 2020 to 2030 is forecasted in the chart below:

Major competitive vendors that provide insurance industry technology include:

• SelectQuote

• Insurify

• The Zebra

• Policygenius

• TrueMotion

• Esurance

• CoverHound

• Insure.com .

EverQuote's Recent Financial Trends

Total revenue by quarter (blue columns) has continued to drop due to exiting its healthcare business line; Operating income by quarter (red line) has remained heavily negative as the firm has not replaced its previous revenue streams:

Gross profit margin by quarter (green line) has dropped in recent quarters on continued costs for scaling its direct-to-consumer-advertising segment; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have risen more recently to levels previous to its restructuring.

Earnings per share (Diluted) have worsened sharply as the company has taken restructuring charges upon exiting its health insurance segment:

(All data in the above charts is GAAP.)

In the past 12 months, EVER's stock price has fallen 10.33% vs. that of SelectQuote, Inc.'s ( SLQT ) rise of 117.91%:

For balance sheet results, the firm ended the quarter with $39.0 million in cash and equivalents and no total debt.

Over the trailing twelve months, free cash used was ($11.0 million), during which capital expenditures were $4.1 million. The company paid $25.9 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For EverQuote

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be SelectQuote:

(Source - Seeking Alpha.)

SelectQuote's one-year stock performance has far exceeded that of EverQuote's, likely due in part to its revenue growth rate, low negative income margin and positive operating cash flow over the past four quarters.

Commentary On EverQuote

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023's results, management's prepared remarks highlighted a stable budget outlook from direct carrier clients but continuing weakness with agent-based carriers.

While its automobile segment continues to face challenges due to reduced carrier spend, the firm has seen growth in its home and renters vertical.

Management believes that there are some encouraging signs that some insurance carriers are making meaningful progress in regaining their required levels of profitability as inflation abates and pricing changes are approved by state regulators, among other actions.

However, some carriers continue to struggle, and leadership is uncertain as to the 'timing and slope' of the nascent recovery in 2024, if any.

Also, the Auto vertical accounts for 78% of the company's revenue, so when the auto insurance market performs poorly, EverQuote does, too.

The other side is that as and when the auto insurance market recovers, so too, presumably, will EVER's revenue.

I prepared a chart showing the frequency of a variety of keywords and terms used by management and analysts:

The chart indicates the company and its clients have been facing volatile conditions with significant headwinds in a challenging and uncertain business environment.

Analysts questioned the leadership about VMM margins, the home and renters market and the market share outlook.

Management said that variable marketing margins [VMM] have been high due to increasing ad spend efficiencies and new bidding technology.

The firm has grown its home and renters segment through its dedicated team, growing agent demand, and its inherent consumer traffic footprint.

On market share, management expects that its strong relationships with carriers will help it retain market share, but there may be headwinds in the agent channel due to carriers reducing or eliminating subsidy support payments to agents.

For the quarter's results, total revenue fell 46.7% year-over-year, and gross profit margin dropped by 5.4% as the company exited its health insurance segment.

Selling and G&A expenses as a percentage of revenue increased by 1.7% YoY, and operating losses rose by 46.3% to $9.8 million for the quarter.

The company's financial position is moderate, with $39 million in cash and equivalents and $25 million undrawn on a working capital line of credit that is available through July 2025.

Looking ahead, full-year 2023 revenue is expected to drop by 30.3% in part due to exiting the health insurance segment.

This would be compared to a 2022 revenue drop of 3.46% over 2021.

An important question is whether the worst is over for the automobile insurance sector as inflation continues to drop.

My sense is yes, but the other related question is how long the industry will take to achieve meaningful growth again. It's hard to know at this point.

Until we see materially positive signs of auto insurance industry normalization and growth, I remain Neutral on EverQuote, Inc. stock.

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