Rover is the largest network of pet sitters and dog walkers, connecting pet parents with pet care providers across North America and Europe.
The company has the potential to achieve over 30% adjusted EBITDA margins and is currently trading at a low valuation.
Rover's dominant marketplace position, high gross margins, and low capex intensity make it a highly profitable business with significant growth potential.
"In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value."
- Warren Buffett
Rover is the world’s largest network of pet sitters and dog walkers. Rover connects pet parents with pet care providers who offer overnight services, including boarding and in-home pet sitting, as well as daytime services, including doggy daycare, dog walking, and drop-in visits. The marketplace has more than 500,000 pet care providers across North America and Europe.
Rover is listed in the US and is currently trading for $6.5/share and has a market capitalization of $1.15 bn with $250 mn in cash for an EV of $900 mn. While headline valuation metrics can look expensive, we believe Rover is under-earning. It has the potential (and LT management guidance) to achieve 30% plus adj. EBITDA margins.
In fact, most marketplaces have very high margins as all they do is essentially collect a toll without a need to have any assets. As a marketplace scales, the two biggest expense items are (a) demand generation, and (b) supplier incentives. Once the marketplace is scaled and has both demand supply, both these expenses can be throttled back and the real economics of the business come through.
With Rover, if we assume ‘look through’ margins of 30% then it should have $69 mn in adj. EBITDA in 2023 and $90 mn in adj EBITDA in 2024. It is trading at 10x fwd EV/adj. EBITDA. Now that is cheap for a dominant marketplace with a recurring revenue business!
Introduction
Rover was started in December 2011 by three dog lovers in Seattle’s tech scene. Greg Gottesman, who spent 20 years as a venture capitalist, came up with the idea after his Labrador was mauled at a local kennel. He recruited Microsoft’s former general manager Aaron Easterly to be Rover’s CEO, and Philip Kimmey to be the company’s director of software development.
In 2020, Rover came public through a SPAC led by True Wind Capital (ex-KKR). It was a successful SPAC in the sense that it infused Rover with a lot of capital but like all SPACs in 2022, the stock has discriminately sold. The business was also heavily affected by Covid which resulted in fewer people traveling and thus needing less pet-sitting services.
Today, Rover is the largest peer-to-peer marketplace business that connects pet parents with pet service providers. The platform is full featured. It handles everything from search, booking, chat, and payments. Rover generates revenue by charging a booking fee to pet parents and a take-rate to service providers.
While the platform allows for a variety of pet related services, the majority of the gross booking value comes from overnight bookings, as shown below.
In FY22, with the Covid-related issues in the rear view mirror, Rover has been beating expectations and firing on all cylinders.
In any technology business one has to be confident that the management is focused not just on growth, but also profitability.
“Aaron, the CEO, is an economist. Brent, the COO, who was my boss for a period of time there is very analytical and also has a big economics background. I think sometimes that serves the business really well, but it also makes it hard to invest in longer-term plays because we were always so worried about the unit economics tomorrow.”
It is interesting because typically, one would expect the opposite out of a SPAC/tech company. Most of them neglect unit economics while claiming that they are maximizing for long-term growth. Rover is different - it's a financially well-managed technology company.
Business Quality
A two-sided marketplace is a wonderful business model. We argue below that Rover is a high quality business that meets the tests above of a successful marketplace.
Rover is a high quality marketplace business
Fragmented demand and supply: Rover sits at the center of a very fragmented supplier and user base. As of 2022, Rover connected ~1m+ pet parents to more than 320k service providers. 98% of service providers are non-professionals that are doing it to earn a bit of extra income (~$2.2k/yr on avg).
Dominant : Rover is “the” marketplace for pet sitting. The company’s closest competitor is Wag!, whose GBV is <1/8th of Rover’s. Wag! is also a business that is focused on on-demand dog walking (lower TAM/ASP) vs overnight boarding.
No good alternatives: Neither pet parents nor service providers have good alternatives.
Think of it this way: For pet parents, Rover is akin to AirBnB for pets…if OTAs didn’t exist (Wag! is the only other website); hotels were like prisons (look up photos of kennels); and the only alternative was to beg your parents or friends to let you stay with them.
Even if you have a willing friend/family member, they need to live somewhere that can accommodate your pet, and be free the entire time you’re gone. You’ll also feel awkward sending specific care instructions to someone doing you a favor. (Ever tried asking your in-laws to brush your dog’s teeth every night?)
For service providers, while there are alternate advertising channels available, it will be much more difficult to find pet parents who are willing to pay you to board their pets (issue of trust)
In essence, this network effect becomes the moat:
“You need heavy supply before you can even consider pricing. And the reality is if you have a very limited supply of pet service providers, you're not going to be able to even come close to competing on a pricing front. And that is just the first barrier to entry. It is pricing. People care about experience, safety, credibility, all those things, which just comes with volume.”
No labor issues : Unlike Uber or Doordash, Rover doesn’t rely on the “gig economy”, and doesn’t face similar labor issues.
Rover is growing very quickly, with a long runway ahead
Rover is still in its fast growth phase. For FY22, it grew revenues 58%.
In 2023, growth will decelerate. Management’s 2023 guidance implies 21% revenue growth (an estimate that we think they will beat). FY22 growth included quite a bit of average booking value growth, due to service providers raising prices in line with inflation. Nevertheless, booking volumes are still growing at high teens+ rates, and saturation point seems long way off:
90% of pet care is still provided by friends and family. While they will remain the primary choice, there’s plenty of room for Rover to grow while still being a “niche solution”
Rover’s services are broadly used across city, age, and income brackets, as per the slide below:
Rover launched in the UK / Europe in 2018, and is currently growing at 100% YoY, albeit off of a small base.
Economics of a mature, dominant marketplace business is extremely attractive
High-value add marketplaces with dominant market shares are essentially license to print money, for a few reasons:
High gross margins: marketplaces don’t really “sell” anything - it’s a media business, and as such, typically sport very high gross margins.
Operating Leverage: Marketplaces are simple operations with high operating leverage. Marketplace businesses are simple operations. Once you become “the place to go”, you just have to maintain the status quo. A hallmark of a great marketplace business is that marketing costs decline rapidly as you become the dominant player, as network effect ensures that buyers and sellers naturally gravitate toward the platform.
Low capex intensity: Marketplaces typically do not need to own assets to serve its customers - both buyers and sellers.
The Op leverage due to marketing expenses is shown below:
Pricing Power: There's a fair bit of pricing power. As the only player in town, you can charge high prices for using the platform. Rover has a take rate of 22% and there is still a fair bit of room for Rover to optimize and increase its take rate.
Rover exhibits all of these features - Gross margins are high (75-80%), marketing costs are falling rapidly, with a strong source of “free” customer acquisition and we’ve seen fixed costs such as G&A and R&D costs start to fall as % of revenue recently.
The company is currently at 15% adj EBITDA margins and is aiming for 30%+ adj. EBITDA margins. We think it can do a lot higher. Check out these EBITDA margins for other, mature, dominant marketplace businesses.
Rightmove, UK property portal: 75%
Hemnet, Swedish property portal: 54%
Adevinta France, a general classified site: 47%
AutoTrader UK, UK used car marketplace: 71%
Whatever the number ends up being, Rover is very likely to be a highly profitable business . As mentioned previously, given the quality, growth, and potential margins, Rover is trading at a very low price today.
A dominant marketplace that is inflecting on margins should trade at a much higher valuation. We believe the current valuation of 10x ‘look through’ adj EBITDA will prove to be very cheap in hindsight.
It seems like the management agrees with us and has instituted a $50 mn buyback program which should support the stock price in a highly volatile market environment.
Risks
Competition
Wag! is a small but fierce competitor. It has gone through various phases in its life including a phase where it was funded by Softbank which encouraged it to ‘go for it’. Wag! too came public via a SPAC - but in 2022 when it was a little too late; due to this, the SPAC could not raise any capital as it came to the market and had some debt to boot. While we think the management team here is competent, they have been dealt a very difficult hand.
It is important to note that the economics for Wag! are achieved by taking a 40-60% take rate.
To further emphasize, Wag! takes $40-60 for every $100 transaction while Rover takes $22. While this can temporarily boost profitability (which they need to service their high cost debt), we believe this is to the detriment of long term profits and business sustainability.
Unlike Rover, Wag! has a different business model:
“People associate Wag with on-demand. Think of it as like an Uber. You need a service. Who's the quickest person? When can they get here? Versus Rover, which was traditionally associated with more of a Yelp kind of marketplace, where you are going to source things not necessarily on demand”
In essence, with the Rover model, a pet parent has control and with the Wag! model it is an algo matching the pet-parent with a caregiver. We think Rover has clear advantages in this industry:
“I think with sitting and boarding, the control aspect made sense because I think there is really no need for on-demand sitting and boarding unless it's like an emergency. And sitting and boarding is usually for a lot longer time than like a 20, 30-minute walk. And so the risks of you putting your pet in the hands of a stranger for that amount of time are just inherently greater than you trusting a stranger for 30 minutes to take your dog on a walk.”
There is currently a large gap between Rover and Wag!’s take rates - we see it as a free option for Rover to incrementally and strategically take its take rate up over the next few years.
Travel-dependence
Rover’s revenue model is bookings driven. The main driver of its services is vacation related travel.
If we hit another lengthy mass travel disruption event in the US, it’s going to be ugly.
Margin achievability
While theoretically, Rover should be highly profitable, this depends on management’s spending discipline and shareholder treatment. The company is currently ramping up margins, and it’s hard to imagine Rover blowing through its balance sheet right after coming out of COVID. Nevertheless, as much of the spending is discretionary, we won’t know what mature margins look like until we get there.
SBC is definitely a factor when considering terminal margins. The company reserved 17m shares (<9% of shares outstanding) for its 2021 equity incentive plan and ran through about 60% of it in the last 7 quarters, so overall dilution isn’t a deal breaker, but something to watch out for.
Service provider onboarding and churn
Disintermediation, where a pet owner and pet care provider transact offline becomes a risk. While Rover isn’t a gig economy company, it still relies on a new breed of suppliers - those that are willing to take care of other people’s pets for a bit of extra income. Rover has to create supply by onboarding service providers. Unfortunately, Rover does not report supplier churn numbers. However, this is expected to be high. Rover notes that over 800k care providers have been paid, with there being 320k active providers today.
Conclusion
Rover is the leading pet services marketplace in the US, Canada, and Europe. We know that people love their pets. This pet ownership has grown on a secular basis including during periods of macro weakness - the US pet industry grew during the 2008-10 recession.
Rover is the clear category leader with ~10x+ more scale than its closest competitor, and possesses the attributes of a high quality marketplace business. Rover turned profitable in 2022, and in our view is well positioned to drive significant profit growth through operating leverage. There are also a number of ‘free options’ opportunities such as international expansion and new service/pet offerings.
When we combine the above with low valuations and a net-cash balance sheet, we find a stock with the ability to compound at attractive rates.
We want to acknowledge that Panoramic Capital, a friend of the firm, came up with the original idea and made significant contributions to this report.
Disclosure: White Falcon has a long position in the shares of Rover Group.
Disclaimer
Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. It should not be assumed that any of the transactions or investments discussed herein were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the investments discussed herein. Specific companies or investments shown in this presentation are meant to demonstrate White Falcon’s active investment style
White Falcon may change its views about or its investment positions in any of the securities mentioned at any time, for any reason or no reason.
White Falcon disclaims any obligation to notify the market of any such changes.
The information and opinions expressed in this presentation is based on publicly available information about the securities.
The letter and thesis includes forward-looking statements, estimates, projections, and opinions, as well as more general conclusions. Such statements, estimates, projections, opinions, and conclusions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond White Falcon’s control.
Although White Falcon believes the data and numbers are substantially accurate in all material respects, White Falcon makes no representation or warranty, express or implied, as to the accuracy or completeness of any written or oral communication. Readers and others should conduct their own independent investigation and analysis of the thesis of any and all companies mentioned in this document.
The letter is not investment advice or a recommendation or solicitation to buy or sell any securities. White Falcon undertakes no obligation to correct, update, or revise the Presentation or to otherwise provide any additional materials.
White Falcon also undertakes no commitment to take or refrain from taking any action with respect any of the companies mentioned in this letter.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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