Many hot initial public offerings (IPOs) over the past few years have jumped immensely on their opening days, and the newly public company Expensify (NASDAQ:EXFY) is no exception. Shares were priced at $27 ahead of its market debut Nov. 10, and it proceeded to surpass $41 -- a 52% jump.
This expense management software tool has something many IPOs in 2021 and 2020 don't have: profits. Does that mean you should put this company on your watch list?
What does Expensify do?
Expensify operates in the expense management market, offering software to mid-market companies so they can manage their money and employee expenses. The company was built on ease-of-use, making sure customers can spend less time managing company expenses and more time growing their business. Expensify has a wide offering of products, from SmartScan expense management (where employees can simply take a picture of a receipt to be reimbursed), to bill paying and invoices.
What really makes this business special is its strategy to acquire customers. While most expense management companies target executive teams and accounting firms, Expensify focuses on the everyday employee. By offering a free introductory solution that targets individual employees, Expensify hopes to generate hype inside a company from the bottom up. So far, it has been paying off: The company has 639 paying members.
This space does not come without competition, however. The company faces all different types of competition, ranging from large businesses like Intuit to fast-growing start-ups like Certify and Zoho Expense. Some of the larger companies have broader offerings with larger cash balances to fuel growth, while others focus on more stable customer bases like the enterprise market. The key differentiator for Expensify, however, is its bottom-up approach.
A profitable IPO?
While it shouldn't be a major surprise for an expense management company, it is handling its own expenses very well. Expensify has managed to keep its marketing and administrative expenses low, enabling it to nearly triple its research and development budget. The company spent just $7 million in sales and marketing expenses so far this year -- representing just 14% of gross profit. This helped Expensify obtain $14.6 million in net income in the first six months of 2021. The company's gross margin is also at an impressive 77% while its free cash flow generation is riding high at $21 million so far this year.
Revenue growth is accelerating for the company, but its full-year growth is not as high as many software-as-a-service (SaaS) investors might like. From 2019 to 2020, revenue grew 9%, but that accelerated to revenue growth of roughly 60% in the first six months of 2020 compared to the year-ago period. While this might be much more appealing, it is important to remember that Expensify chose when it came public, so these growth rates are likely the best of the best and could decrease from here.
Another lowlight for the company is its user growth. Year over year, the company's second-quarter customer count increased just 1.5%, and this figure has decreased substantially from its high of 742, which was set in the first quarter of 2020. Before the COVID-19 pandemic, customer growth was relatively stable, but since the pandemic started, its customer growth has stalled. Despite this stagnation in growth, the company does not have any worrisome customer concentration.
So is Expensify worth it?
Despite its unimpressive growth in 2020, this $3.5 billion company is valued at over 300 times earnings and 29 times sales. Even at multiples of 10 to 20 times sales, there are companies growing much faster than Expensify. For reference, Microsoft trades at 15 times sales and 38 times earnings, yet the company -- which already has a market cap of $2.5 trillion -- grew revenue 22% year over year in its latest quarter.
Expensify is a very interesting company, but nothing is screaming at me to buy it right now. The company has a large number of competitors, and there is not much that makes it stand out from others. The main advantage it has is its customer acquisition strategy -- which could be replicated. Its growth so far in 2021 is impressive, but I have to believe that there is a reason the company chose to go public today, and I suspect that its revenue growth will slow closer to its full-year 2020 growth as the year goes on.
As long as these concerns loom, I will not be willing to pay a high premium for this company, and I would much rather wait a few quarters to see if Expensify can bring back its 60% growth. If that happens, I would be much more interested, but until then, I will be paying attention to other interesting IPOs.