One of the few advantages of richly valued markets is that it incentivizes promising startups to make the leap into becoming a public company. One such promising startup that began trading about a year ago through a SPAC merger is Rover (NASDAQ:ROVR). Rover is the world’s largest online marketplace for pet care. Think dog walking services,looking after pets while the owners travel, and add-on services like pet insurance. The company benefits from a large untapped market opportunity, supported by tailwinds on increasing pet adoption and spend on family pets.
Rover came to the market with what could be argued was a somewhat high valuation, but shares have considerably gone down since, presenting a potential opportunity for investors. Despite the share downtrend, the company has been reporting encouraging numbers and we believe this will change the direction of the share price. In particular because we believe Rover to have a high-growth financial profile with attractive unit economics.
Our preferred indicator to get an idea of the value of a platform is its gross booking value, which represents the economic size of the transactions that take place in the platform every year. This metric has been quickly increasing, from a humble start in 2014 of only $16 million, to $522 million in 2021. Rover has experienced growth of 65% CAGR in its GBV from 2014 to 2021, which is an extraordinary pace of growth and means we could yet see this platform get much bigger.
There was a significant drop in GBV in 2020 due to the impact of the Covid lock-downs, but activity has quickly resumed as strict health measures were relaxed, and GBV is comfortably above even 2019 levels. Other interesting metrics that point to an attractive platform are the high repeat booking rate of 82%, and the fact that the company dominates this niche with it being ~11x larger than the next largest competitor.
While new strict Covid measures or travel restrictions could affect Rover’s growth, it is encouraging to see that the business is recovering in line with, yet still ahead of, travel. In fact, Rover posted record GBV in Q4 2021. This means that when travel fully recovers we should expect even better performance.
One thing we like to look at for online companies with app, is what their app rating is and what type of comments users post about it. We are happy to report that the Rover App has a good average rating, and has been downloaded more than a million times. You can see a screenshot of the app on the Google Playstore, and the app also has a very good rating on the Apple Appstore.
The company possesses a competitive “moat”, mainly thanks to the network effect. Most pet parents looking for a pet sitter will tend to go to the platform with the most pet sitters, and most pet sitters will seek to operate where there are more customers. This strong effect makes it difficult for other companies to compete once one has enough scale and momentum. In Rover’s case it seems it currently dominates its niche, and it seems to have reached a scale where it would be very difficult and expensive for a competitor to take their number one position.
Further strengthening its competitive advantages is the use of AI and machine learning by the company to improve and continuously make better matches, resulting in a better experience for both customers and pet sitters. Applied data science therefore drives platform “stickiness” and increases user loyalty. Some examples of the resulting improvements include better matches, as well as showing good/relevant providers higher in the search results.
With millions of services booked, millions of pet profiles, and millions of search sessions, Rover can use data science to create competitive advantages. It can use all this data to improve matching, marketing, operations, safety, better notifications, advertising, and future products and offerings such as add-ons monetization rates.
Most of Rover’s financial indicators have been trending in the right direction the last few quarters. For example, GBV has increased the last four quarters and reached $166 million in Q4 2021. If we annualize that number we get $664 million, which gives us insight as to the size of the “economy” taking place in the platform. Multiplying GBV by take rate we get revenue, which reached $38 million in the last quarter. The company has also reached adjusted EBITDA profitability, posting positive and growing numbers the last 3 quarters.
For this type of emerging platform business we like to compare its enterprise value to its annual GBV. Taking the current market cap of $1.07 billion, adding debt, subtracting cash and cash equivalents, we get an enterprise value of $821 million. This is 1.23x the annualized GBV using the most recent quarter’s data. Given how fast the company is growing and the improving financials we think this is a reasonable valuation for the company. To be able to compare to other software businesses we can also estimate the EV/Revenue multiple, which in this case would be 5.4x if we annualize the revenue of the most recent quarter reported. This is also relatively cheap compared to many other software businesses that have fewer competitive advantages, and are growing less quickly. For reference, the EV/revenue valuation is less than a third that of Airbnb (ABNB), despite Rover currently growing at a much faster rate at an early stage of growth.
As we’ve seen, Rover is a promising platform growing at a good pace and showing pretty solid unit economics. The valuation is not absurdly cheap, but it is not obviously expensive either, it seems to be relatively reasonable. This implies that if the company continues growing and improving its financials, investors can expect to be rewarded with higher share prices. This will be an interesting company to follow, and given the opportunity we have made a small investment in the company. Given that we see it as high risk/high reward type of investment opportunity.