1 Online Ordering Stock Is Seriously Undervalued

Olo (NYSE:OLO) isn’t a household name to many investors because it’s primarily a B2B play to help restaurants manage online orders more efficiently.

If you’re in the restaurant business, though, you might be familiar with it as a platform that facilitates online ordering. Olo allows customers to place orders if they don’t want to visit a restaurant in person or order by phone. 

Restaurants rely on Olo to receive and process these orders, and send them to their respective kitchens for preparation. For restaurant owners, it’s a win because staff can manage ordering without dealing with paper receipts and tracking customer purchasing behavior is made a whole lot more simple.

The value proposition to restaurant owners is clear but what about to Olo investors?

Olo Share Price Slid This Year

The S&P 500 is up 13.1% this year so far but Olo has gone in the exact opposite direction, sliding by 15.5% year-to-date.

It’s not entirely surprising to see why Olo has gone backwards from an investor perspective. The culprit has been a slowing growth rate in revenues.

In Q1 2021, Olo reported top line growth of 124.8% and that number has been falling steadily in the intervening quarters all the way to the most recent Q2 2023 quarterly report of 21.2%.

The slowing pace of growth has been punitive on the share price but, on the other side of the coin, is that the company has reported ten straight quarters of year-over-year revenue growth. That’s an impressive accomplishment, particularly in light of the 2022 correction in the overall stock market.

Is Olo Stock Undervalued?

The fall in Olo stock this year has caused the market capitalization to dip just south of $1 billion. For a company pacing $200+ million in revenues annually, the valuation seems reasonable. 

So, is Olo stock undervalued? According to the five analysts covering the stock, Olo share price has 80.5% upside to fair value of $10.50 per share. A discounted cash flow analysis puts a more conservative estimate of $7.41 per share on Olo.

It seems that management, analysts, and a DCF analysis all agree that Olo is undervalued. Management has initiated a share repurchase scheme to signal its belief that the stock has considerable upside at this time. Last year, it announced a $100 million share buyback scheme.

It’s worth highlighting that in September 2022 when the buyback was announced, Olo share price traded at around $8 per share.

If the Olo Board of Directors thought the company was undervalued at $8, and a year later revenues have continued to rise, you could reasonably assume that with the share price 35% lower, their conviction has only intensified.

But are they right?

Are Insiders Missing Key Metrics?

Although it’s clear that Olo stock is trading below fair value, it’s not all sunshine and roses for the firm, which has failed to report positive operating income in a single quarter over the past two and a half years.

Investors may also have a growing concern that Olo’s cash position is worsening from $586.6 million in Q1 2021 to $318.0 million in Q2 2023 alongside $83.7 million in short-term investments.

The company also has grown debt from nothing to around $18 million as of the last quarter, though that doesn’t appear to be significant in the context of the sales and cash levels.

Still, insiders might be focusing on the top line growth, which continues to impress, and paying less attention to the things Wall Street cares about, profitability and decelerating growth.

If management can scale revenues without growing costs commensurately, it will demonstrate the kind of scalable business model that investors reward.

Further, levered free cash flow is hovering right around $2.0 million presently, which is not the kind of figure that excites institutional investors with the capital reserves to move the stock higher.

Nonetheless, analysts are increasingly recognizing the good news is outweighing the bad and four of them have revised estimates higher recently.

Wrap-Up

Olo is the type of company that can easily fly under the radar of most investors because it primarily serves businesses. While consumers may rely on its technology, they don’t necessarily recognize the brand value as they would a company like Starbucks or Nike, for example.

Nonetheless, Olo appears to be quietly gaining a lot of traction, increasing revenues at a pace north of 20% consistently and still enjoys a healthy balance sheet that is rich in cash and low in debt.

Both a discounted cash flow forecast and analysts place fair value higher by between 33.8% and 80.5%, respectively. 

Management appears to be bullish, too, on the firm’s prospects and kicked off a 9-figure share repurchase scheme last year when Olo stock price was substantially higher.

For investors to get excited by the stock, management will likely need to turn the revenue growth into profit growth and boost free cash flows, which are negligible at this time.

Olo appears to have a compelling value proposition to restauranteurs and is likely to continue growing for the foreseeable future. As such, it’s got a share price that is likely to creep higher over time and do so quietly without much fanfare until one day it gathers so much steam that it garners a lot of attention.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.