A special purpose acquisition company (SPAC) is a shell company that raises money through an initial public offering (IPO) in order to take a private company public through an acquisition. SPACs have increased in popularity in 2020 as private companies increasingly view them as a good alternative to traditional initial public offerings, and investors are eager to invest in newly public companies.
PropTech Acquisition Corporation (PTAC) just announced it will be taking the home automation company Porch.com public -- making it one of the most recent SPAC transactions. Should investors buy in?
Porch.com SPAC IPO
Porch.com is a software platform for companies that provide services to homeowners. Service providers such as movers and home inspection companies can use Porch.com as a customer relationship management (CRM) platform and also as a business orchestration and execution software. In other words, the platform helps businesses manage relationships and projects so companies can grow their businesses and satisfy customer needs. The company also collects homeowner data which can be used to provide insights on insurance needs, TV/internet subscriptions, security, and potential home improvement needs. This data could be valuable in generating leads for those same service providers.
Following the deal, Porch.com will have an enterprise value of approximately $523 million, which is 4.4 times the company's projected revenue for 2021. The transaction should close in the fourth quarter of 2020.
PropTech already has $174 million in cash that it raised from its 2019 IPO, but to get the deal done, it will need to raise an additional $150 million through a private investment. Existing Porch stakeholders will roll over 92% of their equity holdings into the new entity, freeing up the cash from the transaction to be used for more strategic purposes, like paying down Porch's debt, helping to support its working capital, and funding growth through acquisitions.
A software platform for reaching homeowners
Porch.com describes itself as a "B2B2C platform" that makes money through transactional revenue. The platform aggregates homeowner information for service providers to use for generating leads and executing contracts. Over 11,000 home service provider companies use the platform today.
The company generates revenue when services are provided by taking a small cut of each transaction. In 2019, Porch.com facilitated over 780,000 transactions that it was able to monetize. This resulted in revenue of $73 million and gross profit of $57 million (based on the 78% gross profit margin expected for 2020).
The tech platform is proving to be an important part of the homeowner business ecosystem. As much as 65% of homeowners are reachable through the platform, and the company estimates that 26% of U.S. home inspections were processed through its system in 2019.
An intriguing growth stock
The rising importance of Porch.com has enabled it to grow quickly. The company anticipates 2021 revenue growth in excess of 50% and a net revenue retention rate well above 100%. With a $200 billion addressable market, if the company can hit its financial targets, it may prove to be an interesting growth stock to watch.