While most of our positions are in companies in the traditional real estate and infrastructure sector, we are also able to make investments in real estate technology companies. One company that earned our interest was Updater (UPD), a company solving a real problem that we could relate to.
These positions are small to reflect the risks involved, but we think worthwhile given the potential returns for our investors. At Newgate we take a sceptical view on many of the business models supporting technology companies. When we look at emerging companies, we need to see several conditions satisfied to warrant an investment. Whilst prohibitive, we believe that the hurdle must be high to appropriately reward the Fund for the risk taken.
Updater: Simplifying house-moving
Updater is a platform that helps Americans simplify the effort involved in moving from one house to another. It benefits both the real estate agent and the mover, allowing both to centralise and easily complete all tasks associated with the move.
It’s estimated that there are 17 million annual household relocations in the US. The average American may move between 10-15 times over their life.
We first became aware of Updater around its initial public offering early last year. What immediately interested us was the ambitious growth target the company had set, what they had already achieved, and what the future potential was in a market such as the US.
At the time of IPO, Updater was processing around 2% of all moves in the US. In less than two years, the company is now processing over 11% of all moves. We like this proven growth, and that it is in the US market, the largest and the most attractive market in the world.
But if it's free, how do Updater make money?
While the platform is free to use, the business model is around helping companies gain access to the Updater platform to sell goods and services to movers. Central to the Updater investment case is the fact that people tend to make large spending decisions around the time of moving. This can include physical purchases such as furniture, fittings and electronics, as well as services such as cable TV, utilities and insurance.
The largest providers of these services spend hundreds of millions trying to limit customers leaving them when they move, and trying to acquire new customers. For example, it is estimated that Liberty Mutual, a large US insurer, has a marketing budget of US $500 million per annum.
However, these companies have no way of reaching the customer at this key decision making point. They often only out find a customer has moved after they have moved. Until now.
Over the last year, Updater has signed pilot programs with the largest US companies in several industries - Insurance (Liberty Mutual), Banking (Capital One), Moving Services (several of the best including Hilldup and Ace Relocation) and Communications (AT&T). Their intent was to prove the value of the Updater platform to these major companies.
The first two pilot results have been extremely positive, proving that the Updater platform works very well in acquiring customers for these large organisations.
If we look further out. What could Updater be worth?
We believe that if Updater continues its success, there is no reason that it cannot become the de-facto software product that facilitates moving. Companies like Uber, Airbnb and Google have become synonymous with travel, accommodation and search, where they have a dominant market position. In our view, there is nothing to stop Updater from having a dominant position in the US moving industry.
At the current rate of growth, in two years’ time Updater could easily be processing 30% of all US household moves.
To provide an example of the earnings power of Updater, we will undertake some scenario analysis on the value creation in home and casualty insurance.
This analysis suggests that Updater can deliver $US 373 million of profit to the insurer. If we assume Updater takes 30% of this value created, that is revenue to Updater of AUD $140 million. Assuming a 50% margin on this revenue, profit to Updater is $70 million. If we put this on a market multiple of 17 times, this represents a market capitalisation of A$1.2 billion, or $2.52 per share. This compares to the current Updater share price of $0.98 per share. We have reviewed the value of just one vertical, there are many more.
The future potential Updater has outlined opportunities in the following industry verticals:
- Auto Repairs & Maintenance
- Appliances & Electronics
- Banking - Savings/Checking
- Cable, Satellite, Internet
- Gas, Electric, Water
- Health Care Providers
- Home Repair/Contractors
- Home Services (Landscaping, etc.)
- Local Services (Dry cleaner, etc.)
- Moving Companies
- Pharmacy Conclusion
We have highlighted the value from Updater successfully executing in one industry. Clearly the upside is even more significant if they are successful in emulating in other industry verticals.
Contributed to Livewire by Newgate Capital
Tim has 22 years’ experience in the investment and securities markets. Tim was a partner of Goldman Sachs JBWere and during his 15-year tenure at the firm had senior experience across all areas of equities investing.
Average value of $9k?? This seems to have been pulled from some study of LTV of a customer (i.e. future profits of a customer to an insurer) and presented as though the insurer is willing to give UPD 30% payment upfront and risk free as annual revenue The first point is this number seems incredibly high given the average home owners premium in the US is $1,000 p.a. and a high proportion of the people moving are renters too, who pay about $200 pa in renters insurance Typically a US insurer will lose about 60% on claims and spend 30% on expenses. The acquisition cost part of this will typically be 10-15% through the P&L but up to 40% of first year premium An incumbent insurer will typically lose about 10% of policyholders each year and write 10% new. Simple maths will tell you the lifetime value of a homeowners customer is highly unlikely to be much more than 1x annual premium (before acquisition cost) So to start we could consider dividing the above analysis by ten before even getting to the question of strategy. UPD have to prove to the carriers they can substitute an equivalent risk for an equivalent saving in acq cost; and actually prove they can embed in the purchasing process as much is completed via agents or force placed by the mortgage provider. Next the question for the insurer is whether they want to become a price taker on a panel on UPD’s website. Why will an insurer share 30% of that ‘value’ with UPD when their marginal cost of supplying the service is probably much less and they’ll be desperate to sign carriers as a customer to stop their cash burn. With cash receipts of $259k a quarter on a $500m mkt cap this is likely to become an issue sooner rather than later; not a good negotiating position. The value proposition on reducing churn better be awfully good… Sorry for over analysing but for $500m bucks hopefully the other verticals are really lucrative
Terrific response Max and some great points raised. We will certainly review and revert.
I come at the same problem a different way. The insurance vertical is one of 14 verticals that they are targeting. So I'm not sure why one would do a 17x profit valuation just on this vertical. The critical numbers are: - total number of households ('market share') - $/revenue per household across all verticals - GMs At 15.7% for July just reported they have about 2.5m households on their system, with varying levels of engagement (not all actively use Updater, but even these 'non users' data has some value to advertisers). It's not unreasonable to predict that they will track to 30-40% share or 5-7m households on Updater's system within a year or two. That's a big number to work with. The question is how much can they monetize per household. People make big spending decisions when they move and Updater both knows exactly when they move and offers then the tools to do it. This is the sweet spot for advertisers. In their March release after the 93% up insurance pilot they outlined 'for discussion purposes' $40/household income potential for insurance. Max makes a few very valid points but I think misses that it's not that hard to get to $40 per household for this vertical. If 60% own (and pay $1,000 pa) and 40% rent (and pay $200 pa) as per US averages, the blend is $680 pa. To earn 50% of this first year as a marketing or retention cost is $340 To get to $40 household average per household this would have to apply on average to only 1/8th of Updater users either buying or retaining, including some help from revenues those not engaged but whose data is still used. Obviously the company has had months to refine its analysis of the potential insurance market, including seeing the method and results of the 520% up full service moving pilot. If Updater can get anything close to $40 per household from insurance, it should be a snitch to get >$60 from all the other verticals combined. Even if insurance is only worth $20/household, I struggle to see how they could end up with much less than $100/household total. If insurance really runs as high as $40, the total across all verticals could run into $100s once the business model is refined. GMs for an advertising business likely to run to 70-80%. At $100/household potential the business is a monster and greatly undervalued now. $100 x 30-40% share = $500-$700m annual revenue or $350-$560m GP, say EBITDA $300-500m I'd argue for a multiple of 30x given comparables and plenty of high growth ahead, even in a couple of years, giving a possible valuation within a couple or so years at $10-$15b