2023-11-10 09:33:16 ET
Summary
- Rover Group reported Q3 earnings which beat expectations, while management offered positive forward guidance.
- The stock rallied by more than 20% on the report, which likely incorporated the bulk of the more positive outlook.
- Rover Group is a good stock, but a pricey valuation at the current level keeps us on the sideline.
We spent a bit too much time thinking of a ' pawsitively purrfect' headline to describe the latest quarterly result from Rover Group Inc ( ROVR ). The leading marketplace provider for pet care services beat its earnings expectations with impressive operating and financial trends. Indeed, the report was good enough that shares surged by 25% on the news.
Compared to the disappointing period following the company's 2021 IPO which saw shares lose more than two-thirds of their value, 2023 has been defined by an ongoing turnaround with the stock up more than 100% this year. The sense is that the platform is beginning to benefit from the economics of scale with a path for more consistent profitability.
On the other hand, the challenge here is that the pace of the rally already added a lofty premium to the stock that we believe will make the next leg higher a bit more difficult. We like ROVR but expect some renewed volatility over the near term.
ROVR Q3 Earnings Recap
ROVR Q3 GAAP EPS of $0.05, came in $0.02 ahead of the consensus and also reversed a loss of $-0.08 in the period last year. Revenue reached $66.2 million, up 30% year over year, a solid $4 million above expectations.
The momentum is evident with bookings up 20% y/y with an even stronger gross booking value up 25% y/y to $266 million. This figure reflects to total services being contracted on the platform between boarding and house sitting, alongside an expanding mix that includes dog walking, and drop-in visits.
Typically, rover recognizes approximately 30% of the bookings value as its revenue while the pet care provider receives the bulk of the client payment for their services.
Favorably, the economics are working out with the Q3 adjusted EBITDA margin at 26%, up from 20% in Q3 2022. Adjusted EBITDA this quarter at $17.5 million is up from $10.2 million in the period last year.
An important trend for the company is the climbing number of repeat bookings within the cohort of active users and strong retention. The idea here is that once a pet owner tries the system, they are likely to reuse Rover for future needs adding to a lifetime customer value for the company.
Simply put, regular users are using Rover more and more while the average pricing set by providers has also climbed, consistent with global inflationary trends. This is a strong runway for future growth highlighting the underlying value of the stock.
In terms of guidance, management has hiked its full-year revenue target to a midpoint growth range of around 33%, compared to a prior 29% estimate. Similarly, the expectation is for adjusted EBITDA in a range between $46 and $48 million, at a 20% margin, also up from the $37 - $41 million, and 17% midpoint margin announced with the prior Q2 results.
In the long term, the company believes there is a path for annual revenue growth to average between 20 and 25% while the adjusted EBITDA is seen climbing above 30%. Management projected confidence in the outlook and current operating conditions during the earnings conference call .
What's Next for ROVR?
There's a lot to like about Rover as a segment leader, with strong brand recognition, and solid fundamentals. The company ended the quarter with $200 million in cash against effectively zero financial debt.
Notably, Rover has been active with share repurchases, buying back approximately $49 million in shares year-to-date within a $150 million authorization through 2024. These points are all positive in the company's investment profile.
Going forward, the understanding is that there remains a significant market opportunity not only to grow within the U.S. and Canada by reaching more pet owners but also to expand into Europe.
Roughly 10% of pet owners pay for overnight pet care when traveling, and the effort is to get more of those potential customers to use Rover compared to a traditional kennel service or alternative solution. Overall, the setup here is for a continuation of the recent trends with further organic growth.
According to consensus, the market sees the long-term 20% annual revenue growth guidance from management as the baseline in the forecast over the next two years. Even stronger should be the acceleration in EPS with the 2023 estimate at $0.10, climbing to $0.16 in 2024, and $0.23 by 2025.
While we believe these estimates are otherwise reasonable, it appears the market has assigned a large premium to shares based on this outlook. ROVR is trading at 50x the current consensus 2024 EPS, or around 20x as an EV to EBITDA multiple for next year.
We're okay with these types of multiples for a high-quality growth stock, but we're more skeptical here about whether ROVR can justify a significant expansion of multiples from the current level.
Final Thoughts
Traders and investors who have been in ROVR since the lows of the year hit a home run, but it's probably too late to turn aggressively bullish now. Officially we rate ROVR as a hold, implying a neutral view on shares at the current level. $8.00 is a fair value for the stock, in our opinion.
Beyond a near-term momentum trade, our base case is that the company would need to significantly outperform expectations for shares to climb significantly higher. The risk to consider is the potential that a deteriorating macro backdrop could undermine the growth outlook. Weaker-than-expected results over the next few quarters could open the door for a deeper correction.
For further details see:
Rover Group Stock: Impressive Q3 Results, But We're Not Chasing