Why I'm Waiting For Porch Group To Nail Down Its Growth Story

seekingalpha11-23

Porch Group's stock surged 170% in a year, with analysts predicting 30% upside, but profitability and growth metrics are concerning.The launch of Porch Insurance Reciprocal Exchange aims to stabilize ...

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(NASDAQ:PRCH), based in Seattle and deeply embedded in the home services and insurance sectors, has seen its stock rise sharply, up 170% over the past year. Wall Street seems to think there’s still more gas in the tank, with analysts projecting an additional 30% upside. Seeking AlphaBut, reality has a way of complicating matters. Porch’s Growth and Profitability scores from Seeking Alpha are teetering on the edge of the abyss, hinting that the recent momentum might have been more sprint than marathon. Today, I'll take a closer look at the company’s latest earnings, its valuation, and whether it has the legs to keep climbing, or if it's time to shutter the windows and move on. Company Profile Porch started out as a website where people could connect with home service professionals, like a matchmaking service for homeowners and contractors. But like all good ideas, it morphed, expanded, and eventually ballooned into a much bigger operation. These days, Porch offers software and tools for businesses in home-related industries—home inspections, moving, real estate, utilities, home warranties — you name it. They claim to cover over 160 different tasks, from hiring movers to setting up your internet. What sets Porch apart is that they mix their software with insurance, creating a one-stop shop for things like inspection tools, moving assistance, and homeowner-focused marketing. They’ve also grown by buying other companies, like Homeowners of America, an insurance provider, and Floify, which makes mortgage software. A Closer Look at Q3 A couple of weeks ago, Porch Group shared their Q3 earnings report, and one of the big things they mentioned was getting approval from the Texas Department of Insurance to start something called the Porch Insurance Reciprocal Exchange, or PIRE for short. Basically, it’s like an insurance co-op. The people who have policies actually own the whole thing and share in the risks, profits, and losses. It’s not a new idea. Companies like Farmers Insurance and Erie Insurance have been doing this for years, but it’s new for Porch, and they’ll be the ones handling the day-to-day operations to keep it running. Porch Group is switching to this reciprocal exchange setup to make their earnings more predictable and less impacted by surprise claims or bad weather. They’re starting PIRE in Texas and putting $10 million in to get it going. Around January 1, 2025, they’ll move everything (policies, premiums, and assets) from their current insurance company, Homeowners of America Insurance Company (HOAIC), over to PIRE. In exchange, Porch will get a surplus note, which is basically an IOU. As the operator of PIRE, they’ll also earn about 20% of the gross premiums as fees. Financial Momentum Gathers Pace In an ideal world, this structural shift should boost Porch’s profitability as it gets off the ground. And there are some promising signs already. The latest adjusted EBITDA came in at $17 million, and operating cash flow hit $12 million, both pleasantly above expectations. Add to that a net income of $14 million, and it seems the company is, at least for now, heading in a decidedly positive direction. Operational Improvements Drive Growth Porch has been focusing on hiring more agents and adjusting commission rates, which has made them more competitive and kept their agents happy. This has helped boost profits and grow their network. On the insurance side, things are looking really good, they’ve got a gross loss ratio of 57% and an attritional loss ratio of 21%, both better than expected. On top of that, the average premium per policy is up 25% compared to last year, showing they’re running things well. They’re also expecting their HOA surplus to hit $100 million by the end of the year, which would be a new record. Porch is also leaning heavily into tech, and their tool called Home Factors, according to management, is projected to become a big moneymaker. Management says it’s great for things like making underwriting more efficient, pricing more accurate, and even helping with reinsurance. Apparently, third-party feedback has been pretty positive, too. Like everything else these days, they’ve also added AI to Home Factors, which now does risk prediction and underwriting for 90% of homes in the U.S. And on the insurance side, they’re set up for growth with a 20% cut of gross premiums under their reciprocal model, a cost setup that scales well, and licenses in 22 states. Texas, in particular, seems like a big opportunity for them. Debt Reduction: A Promising Sign One of the standout moments for Porch was their debt reduction efforts, buying back $43 million worth of unsecured debt for just $20 million. That helped lower what they owe and made their financial position stronger. On the revenue side, they brought in $64.1 million after costs, with a solid 58% profit margin, beating expectations. Their software and services business also did well, with parts like Floify holding strong. Software subscription revenue went up by 7% compared to last year, and the Vertical Software segment’s profit margin (EBITDA) improved to 16%. These are good signs that could help Porch grab more market share. And finally here, looking ahead, the company is projecting 2024 revenue between $440 and $455 million, with profits (adjusted EBITDA) expected to get a nice boost too. One standout stat was in Texas, where the premium per insurance policy has grown 42% per year since 2021, hitting $2,508 now. Valuation Seeking AlphaWhen you look at how Porch is valued, it actually seems like a good deal compared to others in the Information Technology sector. Its EV/Sales and Price/Sales numbers show it’s priced pretty attractively based on revenue. For example, its EV/Sales ratio is 1.17 (for the past year) and 1.18 (looking ahead), while the average for the sector is around 3.2. That’s a nice discount. I think this is one of the top reasons behind the recent momentum in share price, as investors who think Porch can improve how it runs or use its solid revenue as a stepping stone for growth have seen this as a good opportunity to jump in. Porch's Impressive Revenue Growth Seeking AlphaBut there’s a lot more to this story. Leafing through its income statement, the company’s revenue growth has been pretty impressive, jumping from $72.3 million in 2019 to $452.1 million in the last twelve months ending December 2023. With a compound annual growth rate (CAGR) of over 40%, Porch is solidly in the \"high-growth\" category for its industry. Rising Costs Impact Margins Seeking AlphaBut this growth hasn’t come cheap. Gross profit hasn’t kept up with revenue growth, which means it’s costing Porch more to bring in that money. To put it into perspective, the cost of revenue jumped from $17.6 million in 2019 to $249.2 million in the last twelve months ending 2023. That’s a big leap. Seeking AlphaThe operating income numbers paint a pretty rough picture too. Porch’s losses have doubled, going from $41.2 million in 2019 to $84.1 million in 2023. But, on a positive note, at least that number is moving in the right direction - lower. Seeking AlphaOn top of that, their interest expenses have shot up from $14.7 million in 2019 to $42.4 million now. This is a number moving in the wrong direction and still dragging down their bottom line, with those interest payments eating into any potential profits. Persistent Net Losses Seeking AlphaPorch’s net income has been in the red for a while too, with losses hitting $65.8 million in the last twelve months of 2023 (that’s actually better than the $133.9 million they lost in 2022, but it still shows the business isn’t running sustainably yet). Earnings per share (EPS) are also consistently negative, which isn’t great for shareholders since it reflects ongoing losses and dilution. On top of that, Porch has been issuing a lot more shares since 2019 to raise money, which further waters down shareholder value. Overall, when it comes to valuation, revenue per share growth might interest growth-minded investors. But with no predictable revenue and accumulating losses, any optimism about the stock is more of a gamble on what it could become in the future than on how it’s performed so far. Q3 Results Show Challenges Now turning back to Porch’s Q3 for more insights, their revenue for the quarter was $111.2 million, which is down 14% compared to last year, and part of that has to do with the Vesttoo situation. Basically, Porch had to cancel its reinsurance contract with Vesttoo after finding out the company was involved in a global fraud. Because of that, Porch had a period of reduced reinsurance ceding, which actually added about $30 million to their revenue, $10 million to revenue after costs, and $2 million to adjusted EBITDA for the quarter. Insurance Segment Takes Hit Glancing at the insurance side of Porch’s business, revenue dropped 16% to $79.9 million, and their Vertical Software revenue fell 9% to $31.3 million. A big part of this was due to severe weather, including Hurricane Beryl, which led to $26 million in claims costs and a 36% catastrophe loss ratio. For any investors new to this kind of business, this is a classic reminder of how unpredictable weather can really mess with profits, which is something Porch’s new PIRE model is trying to help even out over time. Gross written premiums dropped by 10% compared to last year, mainly because Porch sold off EIG and hasn’t seen much premium growth. On top of that, corporate expenses stayed high at $13 million, which is about 12% of their total revenue. Their cash balance also took a hit, going down by $29 million this quarter. While they’ve made some good progress with improving loss ratios, there’s still a lot of risk ahead. They need to juggle a lot of complex tasks, like integrating new models, figuring out how to make money from their data, and expanding operations across 22 states. To make it all work, execution has to be spot on. Plus, many of their new efforts, like tweaking commission structures and monetizing Home Factors data, are still in the early stages, so it’s too soon to say if they’ll pay off. Final Takeaway  I’d say PRCH is a “Hold” for now. They’ve got some exciting growth potential, smart innovations, and improvements like the PIRE launch and AI-powered underwriting. But the ongoing struggles with profitability, high debt, and some inefficiencies in how they run things make it worth being cautious. I think it's probably best (especially if you've managed to be part of these recent gains) to wait and see how well they execute their plans and whether they can turn a profit before investing any more money.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485516210"}