Olo (OLO)

My favorite play on the restaurant industry

Olo is a company I don’t see many people talking about, but I actually like it a lot. In fact, I do own this company, albeit a smaller position for me (~3%). Olo, short for Online Ordering, trades under the ticker symbol OLO. It went public in 2021 and the stock was quickly butchered like most IPO’s last year. The sell-off has provided a great buying opportunity, as the stock is trading at roughly 10 times forward sales. Here’s what I like about this company:

Efficient Go-To-Market Strategy

This is what I love most about Olo. They spend very little on sales and marketing (less than 10% of revenue) because they target large enterprise customers, which enables them to instantly secure exclusivity to all of that restaurants’ locations. While competitors targeting small and medium sized businesses acquire 1-2 locations per customer, Olo’s go-to-market strategy is much more efficient as they can obtain hundreds of new locations at once.

Business Model

Focusing on enterprise customers has resulted in less churn - the company sports a 120% dollar-based net revenue retention rate. This number suggests the platform is sticky, switching is painful, and customers are spending more money year over year. Olo operates a transactional-SaaS model where they charge a subscription fee to use the platform and then take transaction fees. As more modules are adopted, transaction revenue increases, meaning Olo grows as their customers grow.

Optionality

Olo began as a text-to-printer ordering service and has evolved to become a robust SaaS platform. Originally focusing on order management, the company has expanded into customer engagement and payment processing, both of which are relatively new features. Additionally, Olo supports 200+ integrations, including delivery service providers (Doordash, Uber Eats, Postmates) and an API that enables custom ordering apps to hook seamlessly into Olo’s platform. Management has demonstrated the ability to quickly adapt to new trends and effectively extend Olo’s capabilities to meet customer needs.

Financials

For a company in its early growth stage, Olo has strong financials. Revenue has grown 59%, 94% and 52% the last three years, and is still projected to grow 29% in 2022 and 2023. While 30% is not necessarily hyper growth, there is still a lot of growth ahead for this company. Additionally, gross margins are very high (79%) and earnings are trending in the right direction. The company is debt-free, has been free cash flow positive for several years, and has a growing cash reserve of $515 Million. From a financial perspective, there is a lot to like. Given the current economic environment, investing in companies on solid financial footing is crucial.

Management

Olo is a founder-led company with a respected CEO (97% approval on Glassdoor). Insiders do not own a ton of shares, which isn’t ideal. I would classify that as a potential risk, but there are enough positives that I don’t worry too much about this.

Why Invest?

The restaurant industry is massive and many restaurants cannot afford to develop online order management solutions with internal resources. Olo provides a ton of value to customers and has a large market opportunity to address.Management has also impressed with strategic acquisitions (Wisely and Omnivore) and a partnership with Google that enables orders placed through Google channels to go straight to a restaurant’s point of sales through Olo. Combining these factors with the company’s strong financials and efficient go-to-market strategy, Olo looks like a solid investment.