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Here's a Software-as-a-Service Stock I Just Bought

By Brian Feroldi and Matthew Frankel, CFP® – Oct 2, 2021 at 8:23AM

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This company is attempting to transform how the restaurant industry sells food.

There have been a few disruptive stocks when it comes to online ordering from restaurants, but Olo (OLO -3.94%) is taking a somewhat different approach. In this Fool Live video clip, recorded on Sept. 16, Fool.com contributor Brian Feroldi discusses why he recently bought the stock in his portfolio. 

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Brian Feroldi: The last stock that I bought was a company called Olo, which is ticker symbol OLO. Don't know if either you guys are familiar with this company. But Olo, shorthand for online ordering. This is a company that is laser-focused on helping customers to do restaurants to on-demand delivery to their customers.

Now, if you're thinking, "Hang on, don't we already have that. Isn't that called DoorDash (DASH -2.50%), and Grubhub (JTKWY -3.28%), and ON24 (ONTF -2.31%) and many of the other companies that are focused on that?" The answer there is yes. However, online ordering or Olo is attacking it from entirely different angle. Pretend you're a restaurant and you want to offer online ordering to your patrons. One option, an option that many chooses to go with DoorDash because they have the customers. The customers are on DoorDash and they want to buy, have that food and have it delivered.

Well, if you've read anything about the industry, DoorDash charges pretty egregious fees to get that food to the customer. More importantly, while the restaurant is providing the food, they are just a middleman, they are just a supplier. The actual customer belongs to DoorDash. Because of that, a whole bunch of restaurants want to take the capabilities of doing the online ordering in-house. They want to own the consumer experience and Olo enables them to do that.

This is an enterprise-grade software-as-a-service company that does online on-demand restaurant commerce for multi-location restaurants. Olo is hyper-focused on enterprise-level restaurants. Some of their customers, you may have heard of; Five Guys, Shake Shack (SHAK -2.05%), Chili's, Applebee's, Cheesecake Factory (CAKE -1.37%), Peet's Coffee, Jamba Juice, etc. One thing that I really like about Olo is that the way that this company goes to market, is it goes after big companies, and it sells through their corporate headquarters.

A lot of those companies, I just mentioned are franchise and by selling through the corporate headquarters, once the corporate headquarters signs and the data in line, your service gets gets said to all of the companies locations with essentially one transaction. Because of that, this company spends very little money on sales and marketing. To give you a sense, last quarter the company generated $35 million in revenue, $28 million of that was gross profits, so the company's gross margin is about 80%, and they only spent $3.7 million on sales and marketing.

Now, I follow a lot of SaaS companies and I cheer when a company spends less than 50% of its gross profit on sales and marketing. This company spends just about 10% on sales and marketing. A lot of that is because its strategy is to go to the big restaurant chains, focus on the top and have that sent down below. Now, the total number of restaurants out in the U.S. that are using this service just grew 30% to over 74,000 locations. Once a restaurant get set up with Olo's offering, this is an extremely sticky platform. The gross retention rate is somewhere around 98%-99%.

Basically, once a customer gets using this, they are using it. Last quarter, the company's dollar-based net revenue retention rate was 120%. Not only are they doing a great job of signing up new restaurants and keeping restaurants around, but those that they are keeping around are spending more each year. Last quarter, this company's revenue growth was really outstanding, 48% to about $36 million. Gross margin here is very strong at over 80% of revenue. This company is non-GAAP net income profitable. They are a profitable business already and on a free cash flow basis, they're even more profitable than that. After coming public, the company has tons of cash, $575 million in cash. It is still led by its founder. They have great Glassdoor ratings.

If you are a believer that demand for online ordering is going to continue to grow, there are several ways to play it. My favorite is definitely Olo, because it's hyper-focused on helping restaurants to have a personalized relationship with the consumer. They're not going around it with DoorDash. Now that's the core business. But how does the food actually get to the consumer? While there's a couple of ways that the restaurants can do that, and Olo provides that. One is to employ their own drivers so they can they can employ their own drivers at the restaurants and do the delivery of themselves and just completely bypass DoorDash and Grubhub etc. However, Olo's platform also directly integrates with DoorDash and with Grubhub.

A restaurant, if it chooses, can use Olo's platform, its own website, its own app to take the order, place the order, get the order, etc, do all that on its own website. Then if it chooses to, it can have that sent to DoorDash's delivery network or Grubhub's delivery network for actually, for fulfilling to the end-consumer. That allows them to again, retain control of the customer and choose which path that they go through. I think that is an incredibly attractive proposition for restaurants.

On the downside, there is a little bit of customer concentration that investors need to keep an eye on and growth at this company will likely be lumpy. One downside to selling through just corporate headquarters are focusing on that is, what you saw in an any given quarter is going to have a really outsized effect on overall growth. I think this makes sense to look at this company's numbers on a year-over-year basis, not necessarily on a quarter versus the last quarter basis. But Olo is a company that checks a ton of boxes to me, spoiler alert, it's expensive but I think this company has really bright future ahead. That's Olo, ticker symbol, OLO.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Olo Inc. The Motley Fool recommends Just Eat Takeaway.com N.V. The Motley Fool has a disclosure policy.

Stocks Mentioned

Olo Inc. Stock Quote
Olo Inc.
OLO
$6.71 (-3.94%) $0.28
The Cheesecake Factory Stock Quote
The Cheesecake Factory
CAKE
$31.58 (-1.37%) $0.44
Shake Shack Stock Quote
Shake Shack
SHAK
$48.69 (-2.05%) $-1.02
Just Eat Takeaway.com Stock Quote
Just Eat Takeaway.com
JTKWY
$4.42 (-3.28%) $0.15
DoorDash Stock Quote
DoorDash
DASH
$51.90 (-2.50%) $-1.33
ON24, Inc. Stock Quote
ON24, Inc.
ONTF
$7.42 (-2.31%) $0.17

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