Summary
- Rover reported a positive GAAP net income of $5.3 million, representing a net income margin of approximately 10%.
- The international business is seeing excellent growth, with Europe growing 78% year over year during Q4, and the company's average customer lifetime values also improving.
- Shares appear undervalued when compared to the company's annual GBV and based on a forward EV/Revenues multiple of ~2x.
In our last article on Rover ( ROVR ) we noted that the business was maturing. This means that growth is moderating, but meanwhile the company is putting a lot more focus on profitability. In that respect we were quite pleased to see the company report positive GAAP net income of $5.3 million, which represents and net income margin of ~10%. Two other important things jumped at us from the earnings release: one was the company starting a $50 million buyback program, the other the company reiterating its long-term targets. Rover is aiming to achieve revenue growth of ~20-25% and an Adjusted EBITDA margin of 30%+. Rover is also targeting becoming a Rule of 40 company.
In terms of the Q4 and full year 2022 results, the most important metric we believe is gross booking value, which represents the size of the economic activity taking place on its marketplace. For 2022 GBV was almost $800 million, up ~53% year over year thanks to an increase in the number of bookings, as well as in the average booking value. Revenue was $174 million and adjusted EBITDA was $21 million. In Q4 revenue was $52 million, gross booking value reached $218 million, and adjusted EBITDA was $11.2 million. The highlight, no doubt, is the fact that the company reached GAAP profitability in the quarter.
It is also worth mentioning that the international business is seeing excellent growth, with Europe growing 78% y/y during Q4. Growth has been particularly strong in the UK and in France. Lastly, it appears the company believes shares are undervalued, and that is one of the reasons for the buyback. During the earnings call management said this in relation to the buyback program:
[...] our strong balance sheet combined with our view of forward cash generation, gives us confidence in our ability to invest in the business, while also repurchasing shares at an attractive level. Additionally, at this time, we do not see a need to increase cash balances from current levels. As such, our board has authorized a 12-month $50 million share repurchase program that will be executed subject to our ongoing assessment of market conditions.
Life-time Values
The average customer lifetime values have been improving for the most recent cohorts. In particular 2022 is tracking above all the previous ones, as a result of a higher take rate, higher average booking values, and improved repeat booking performance. This is a very positive development, as it means the company can ramp up customer acquisition investments while still getting a positive return on investment.
Operating Leverage
Rover is also increasingly displaying operating leverage in some of its expense categories. For example, in Q4 product development expense was ~11% of revenue compared to ~14% of revenue in Q4 of 2021. Similarly, G&A expenses were ~18% of revenue in Q4, compared to ~27% in Q4 of 2021. One expense category where the company is still ramping up spending is marketing, representing ~18% of revenue in Q4, up from ~16% in Q3. For marketing expenses the company is targeting a range of 18% to 25% of revenue. In 2022 marketing spending was ~20% of revenue compared to ~17% the previous year. Overall there is some operating leverage, with the adjusted EBITDA margin expanding ~200 bps to 22% in Q4 compared to the previous year.
Growth
We are pleased to see that the economic activity taking place on the company's platform is approaching a $1 billion run rate. In Q4 2022 GBV reached $218 million, up 31% y/y. We believe this is the metric that best captures the value of the Rover marketplace, and the revenue the company can generate is proportional to GBV.
Rover Investor Presentation
One of the fastest growing segments for the company is international, which now represents about 8% of GBV. The company believes it is just scratching the surface of the opportunity in some of these markets, and that they should become increasingly important for the company.
Balance Sheet
Rover has a very strong balance sheet, ending the year with cash and investments of $273 million. The company also believes that it is likely to generate cash moving forward, which is one of the reasons it decided to launch a $50 million buyback program. The other reasons is that shares are trading at what the company described as an attractive level. An interesting point about their cash and investments, the company is clearly benefiting from higher interest rates, generating ~$1.9 million in interest during the quarter.
Guidance
Rover provided weak guidance as a result of the company believing there is a good chance of a mild to moderate recession arriving in 2023. For the full year 2023 it expects revenue to be between $205 million and $215 million, which at the midpoint would represent a 21% increase. Adjusted EBITDA for the year is guided at $25 million to $30 million, up from $20.8 million of adjusted EBITDA in 2022. For Q1 2023 the company expects $37 million to $39 million in revenue, which at the midpoint would be a 37% increase y/y, and negative $5 million to negative $3 million in adjusted EBITDA. The expected negative profitability in Q1 2023 is due to the seasonally low nature of Q1.
Valuation
We believe one of the best ways to gauge Rover's valuation is to compare its enterprise value to its annual gross booking value. The company is currently trading with an EV of ~$461 million, and GBV for 2022 was $798 million. The EV/GBV ratio is therefore ~0.57x, which we believe is too low. We believe healthy growing marketplace business should trade at least at an EV/GBV multiple of ~1x. This would represent a fair value for the shares of ~$5.2. At current prices of ~$3.7 we believe shares are undervalued by roughly 30%. We therefore agree with management's comment that shares are trading at an attractive level, and believe a moderately sized share buyback program is a good idea.
Another way to look at the valuation is using the forward EV/Revenues multiple. The forward EV/Revenue multiple stands at an undemanding ~2x. This multiple compares favorably to several other platform companies. For instance, Etsy ( ETSY ) is trading with a forward EV/Revenues multiple of ~5.8x, but it is solidly profitable. More mature marketplaces like eBay ( EBAY ) and Amazon ( AMZN ) trade with multiples of 2.6x and 1.7x respectively. Meanwhile, platform businesses that are still growing at a fast pace like Uber ( UBER ) and DoorDash ( DASH ) have multiples of 1.9x and 2.2x respectively.
Risks
One big risk with Rover is that its bookings are highly correlated with travel, which is significantly affected by the economy as it is a mostly discretionary expense. The company can therefore be expected to be significantly affected by a recession. Given the high likelihood of a recession in 2023, the company provided relatively conservative guidance. Still, if a recession does arrive in 2023, we would not be surprised if results were even worse than the guidance provided.
Conclusion
Rover is increasingly balancing growth and profitability, and it is making good progress towards its target of an adjusted EBITDA margin of 30%+. Growth has been decelerating, and guidance was weak, but despite of that we still believe shares are trading below fair value. We were positively surprised that the company delivered GAAP profitability in Q4, that the company launched a buyback program, and that it also reiterated its long-term financial targets. After reviewing the Q4 and 2022 results we are maintaining our 'Buy' rating, as we believe shares to be meaningfully undervalued.
For further details see:
Rover Q4 Results: GAAP Profitability And $50 Million Buyback Announced