2023-03-25 21:08:05 ET
Summary
- EVER will benefit from a recovery in the auto insurance market.
- The company did a nice job navigating the pressure in the market in 2022.
- That said, the stock appears to already be pricing in a recovery.
EverQuote ( EVER ) looks poised to benefit from the eventual recovery in the auto insurance market. However, that looks mostly priced into the stock at this point.
Company Profile
EVER describes itself an “online marketplace for insurance shopping, connecting consumers with insurance providers.” I like to think of it as an insurance lead-generation business. As such, its customers are insurance companies in the auto, home & renters, and health insurance policy segments.
EVER makes money through referrals in which it provides consumer-submitted quote requests to insurance providers. Referrals come in a few forms, such as clicks, in which EVER hands off the consumer to a provider’s website. EVER also offer two types of online-to-offline referrals: one in which it passes along customer data to the provider for a follow-up and one in which it connects the consumer with the provider by phone. The company also generated about 10% of its 2022 revenue from commissions paid to it by insurance carriers.
The bulk of EVER’s rereferrals are for auto insurance, which accounted for 80% of its FY22 revenue. Progressive and State Farm are its two largest customers, together representing about a third of its business.
The valuation proposition of the business is that for consumers they are able to get multiple quotes from various providers, and thus can save time and money. Meanwhile, for insurance providers, they can get a higher ROI on their ad spending given that they are getting prospective clients referred to them that are looking to buy insurance.
Opportunities and Risks
As a lead-gen business, EVER leverages its own marketing to bring in customers for its insurance clients. As such, one of the big metrics it looks at is something it refers to as variable market margin ( VMM ), which is the spread between the revenue it generates and the advertising it spends.
Thus, one of the biggest jobs for EVER is getting the algorithm right to most efficiently generate profitable revenue. Spend more money on advertising, and the company can theoretically grow revenue however much it wants. However, that might not be profitable revenue, as it needs to make money back off that spend, and it also has fixed costs as well.
EVER has been able to grow its VMM dollar amount and VMM % over the years, although it had to reduce overall sales and marketing spend during the back half of 2022, which limited profitability. The big reason behind this was that insurance companies cut back on their spending as the auto insurance industry took a hit.
Company Presentation
According to EVER, in late summer of 2021, the cost of auto insurance claims rapidly began to rise because of supply chain issues, higher used car prices, and rising accident severity. Given that rate increases need to go through a state approval process, carriers were unable to raise rates quickly enough to adjust to the new environment. Facing elevated combined ratios, auto insurers pulled back on customer acquisition spending.
Other companies, such as Verisk Analytics ( VRSK ), have also discussed the issues in the auto industry , confirming what EVER has talked about over the past several months.
EVER first began talking about this dynamic on its Q1 call in May with CEO Jayme Mendal saying:
"In the past week, for example, one of our large carrier partners unexpectedly informed us that due to -- quote -- "immense profitability pressures this year" -- end quote -- they are dramatically reducing their Q2 and Q3 customer acquisition budgets. As this carrier continues to increase rates to repress these pressures, we anticipate they will reverse course and restore higher budgets once they are able to better align their rates to the current loss environment. As a result, we remain substantially below the levels of carrier demand in our auto verticals that we saw in August 2021, which we believe to be the level to which we will normalize upon the markets recovering. ...
"Let me touch on what everyone wants to know. When will auto carrier demand return and why? To drive expectations about the timing of the recovery in auto carrier demand, we solicit direct input from our carrier partners and we closely monitor their publicly reported profitability trends. The latest collection of data suggests that Q2 demand will likely remain significantly depressed, but that some rebound is indicated to begin by the end of the year with an expectation for full recovery in the first half of 2023."
In February on its Q4 call , Mendal said auto insurance carriers continue to raise rates to restore profitability and that business is beginning to pick up. He said he was optimistic about the current recovery although was uncertain of its exact timing and shape.
The one thing to remember about insurance is that it is regulated at the state level. That means auto insurers need to ask for rate hikes from every single state regulator, so it's not a quick and easy process.
Outside of a recovery in the auto insurance market, gaining more scale in other areas of insurance is an opportunity for EVER. The non-auto business has generally grown faster than auto off a small base, but it too took a step back in 2022 as the company put more resources towards stabilizing its larger auto business.
Company Presentation
Valuation
Based on the 2023 EBITDA consensus of $11 million, EVER trades at around a 36x multiple. For 2024, EBITDA is projected to jump to $27.8 million, putting its valuation at 14x.
It trades at 72x forward EPS, with analysts estimating 2023 EPS of 18 cents.
The 2023 forecast is for revenue to increase 6%, before charging 22% higher in 2024 .
EVER’s stock trades at the higher end of lead-gen businesses.
EVER Valuation Vs Peers (FinBox)
Conclusion
EVER should benefit from the eventual recovery in the auto insurance market. Meanwhile, it did a pretty good job navigating a tough environment in 2022, keeping its VMM and VMM% in line with past performance .
That said, I don’t find the business all that compelling over the long haul, and it appears much of the recovery is already priced into the stock. As such I prefer to stay on the sidelines.
I much prefer CarGurus ( CARG ) in the lead-gen space, which I wrote up here .
For further details see:
EverQuote: Auto Insurance Recovery Looks Priced In