Pushpay Holdings (ASX:PPH) may not be a company that rings a bell with many investors but it certainly warrants some attention.
The little-known software-as-a-service (SaaS) company, which is dual-listed in Australia and New Zealand’s stock markets, has seen its share price rise by around 300% since 2016. That’s a really strong performance.
In this article, I use my blogging partner Ser Jing’s six-point investment framework to assess if Pushpay has the makings of a good investment.
1. Is Pushpay’s revenue small in relation to a large and/or growing market, or is its revenue large in a fast-growing market?
Pushpay operates in an extremely niche market.
It provides churches and non-profit organisations with the tools to create an app to engage their communities. Customers use Pushpay to customise the design and feel of their app-interface. Customers can also communicate with their community members through the app by posting videos, audios and notifications.
Through the app, community members can make donations too. In addition, customers can access donor data, allowing church leaders to take effective next steps for better engagement with donors.
The growing popularity of Pushpay’s app service has been evident with customer numbers increasing steadily since its iOS launch in 2012. As of 31 March 2020, Pushpay boasts 10,896 customers.
Pushpay has two revenue streams: (1) Subscription revenue for its services; and (2) processing revenue, which consists of volume fees based on a percentage of the total dollar value of payments processed.
Despite operating in a niche market, Pushpay actually has quite a large addressable market opportunity. Chris Heaslip is the co-founder and ex-CEO of Pushpay; he stepped down from the CEO role in May 2019. In an interview with Craigs Investment Partners in late 2018, Heaslip said:
“Giving to churches alone is about $130 billion a year, which represents a TAM (total addressable market) of just under a couple of billion dollars. And as we continue to make good inroads in that market and expand our product functionality, we’ll look to expand into other verticals as well, such as the education or non-profit verticals which are about one and two billion dollars respectively of TAM opportunity, for about $5 billion in total.”
Pushpay’s latest annual report – for the year ended 31 March 2020 (FY2020) – mentioned that “Pushpay is targeting over 50% of the medium and large church segments [in the long term], an opportunity representing over US$1 billion in annual revenue.”
For FY2020, Pushpay processed just US$5 billion and earned a total operating revenue of US$130 million, which is still small compared to its total addressable market size.
2. Does Pushpay have a strong balance sheet with minimal or a reasonable amount of debt?
Pushpay does not have the strongest balance sheet with a net debt position of US$48 million as of 31 March 2020. This is largely due to it spending US$87.5 million in FY2020 to acquire Church Community Builder, a church management system software provider.
That said, Pushpay has recently become cash flow positive and should be generating a good amount of cash in the future. In FY2020, Pushpay produced US$23.2 million in free cash flow, a marked improvement from the negative US$3.1 million seem in the prior year.
As the company continues to grow in scale, I foresee free cash flow growth in the years ahead (more on this later).
3. Does Pushpay’s management team have integrity, capability, and an innovative mindset?
I think Pushpay’s executive team have so far demonstrated all of the above. The team has been extremely transparent about their goals and targets for years, and have set revenue and earnings guidance that they have been able to consistently meet or beat.
I appreciate management teams that set realistic guidance and can deliver on their targets, and so far Pushpay has done exactly that.
I believe Pushpay’s rapid growth is also a testament to management’s capability to expand the company, reach new customers, and increase the average revenue per customer.
Management has also been actively seeking to improve the company’s product. In 2019 alone, Pushpay launched numerous new functions on its app, including Donor Development, which delivers donor insights and streamlines reporting to organisation leaders.
Pushpay also launched Pushpay University in May 2019, It is an education website for Pushpay’s customers to “learn from leading experts in leadership, communication and technology, while also deepening their Pushpay product knowledge.”
4. Are Pushpay’s revenue streams recurring in nature?
Recurring revenue is a beautiful thing. It enables a company to focus its energy on expanding the business, knowing that it can rely on a stable source of revenue. It also means that the company can spend a bit more to acquire new customers due to the long lifetime value of its customers.
In FY2020, recurring subscription revenue made up 27.7% of Pushpay’s overall revenue. The rest was derived from commissions that the company earns for processing money that is donated through its app.
I see both sources of revenue as recurring in nature. Subscription revenue recurs as long as customers continue using Pushpay’s platform. Meanwhile, payment processing revenue recurs as long as donors keep making donations via the company’s platform; many donors tend to make repeat donations so payment processing revenue tends to recur. In FY2020, Pushpay’s total processing volume increased by 39% to US$5 billion, as the company likely increased its market share in the donor payment market.
Another metric that demonstrates the recurring nature of Pushpay’s revenue is the annual revenue retention rate. This measure the amount collected per customer compared to the previous year. This figure has consistently been north of 100%, suggesting that existing customers are paying Pushpay more each year as the amount of money they raise through the platform grows.
5. Does Pushpay have a proven ability to grow?
The SaaS company is growing quickly. The chart below illustrates its revenue growth from FY2015 to FY2020.
The growth has been driven both by an increase in the number of customers using the company’s platform, as well as the average revenue per customer.
Equally important, as Pushpay scales, more of that revenue can be filtered down to the bottom line and converted to cash flow.
The company reported its first net profit before tax in FY2020 as costs rose much slower than revenue. The relatively long customer lifespan that Pushpay has enables the company to spend more on customer acquisition, as it can reap the returns over a few years.
6. Does Pushpay have a high likelihood of generating a strong and growing stream of free cash flow in the future?
In FY2020, Pushpay demonstrated that with sufficient scale, it can turn a profit and generate free cash flow.
Previously, the company was in a high growth phase and spent a significant proportion of revenue on marketing. However, as the recurring revenue base grows, the amount spent on marketing decreases as a percentage of revenue and the young SaaS company can turn a profit and generate free cash flow.
In FY2020, Pushpay had a free cash flow margin of 17.8%, a very decent return for a company that is still growing strongly.
Pushpay expects to earn between US$48 million and US$52 million in EBITDAF (earnings before interest, tax, depreciation, amortisation, and foreign exchange fluctuations) in FY2021. This represents 90% growth in EBITDAF from FY2020. As revenue and EBITDAF grows, we will naturally see free cash flow follow suit.
Given the large addressable market to grow into, I believe Pushpay’s free cash flow is likely to grow even faster than revenue as margins improve.
Risks
As a young SaaS company, Pushpay has a lot of potential. However, actually fulfiling that potential depends on the company’s execution. Therefore, execution risk is a major factor in its growth. The company’s ability to scale, attract and retain customers, and fend off competition, will be put to the test in the coming years.
Pushpay also spent a large chunk of cash to acquire Church Community Builder. The acquisition brought with it a ready set of new customers. However, it also stretched Pushpay’s balance sheet.
With growth a priority, management’s ability to put capital to use wisely will be crucial. Given that Pushpay has a very short history, I will monitor how management allocates its capital in the future. Poor allocation of capital could derail the company’s growth.
In addition, competition can be a major threat to Pushpay’s business. For now, Pushpay boasts a loyal set of customers who likely will find it tedious to switch apps. However, there is still a risk that other players may encroach into Pushpay’s territory.
Valuation
Valuation is perhaps the most tricky part of assessing a company. Pushpay is currently valued at around US$1.1 billion. That translates to around 70 times trailing earnings and 8.5 times sales.
On the surface that seems quite expensive. However, the company is growing its sales and profits fast. It also has a large opportunity to grow into. As mentioned by co-founder, Chris Heaslip, donors give around $130 billion to churches alone.
The currency for the $130 billion is unclear – it could be US dollars or New Zealand dollars. But either way, Pushpay’s revenue of US$130 million (NZ$216 million) is much lower than its addressable market size. Given its dominant position in its space, Pushpay can easily grow its market share.
The recent COVID-19 pandemic is also likely to accelerate the migration of donations from being made offline to online, with Pushpay the beneficiary of this trend. Indeed, Pushpay shared the following in its FY2020 annual report:
“Pushpay expects the increase in digital giving as a proportion of total giving resulting from COVID-19, to outweigh any potential fall in total giving to the US faith sector.”
The bottom line
Pushpay may not be the most recognisable SaaS company in the world, but it has got my attention. The company is revolutionalising the way churches interact with their communities.
Not only is it a great business financially, but it is also doing its part to help donors and campaigners raise funds for causes they believe in.
Despite some risks, I still think Pushpay’s risk-return profile looks really attractive right now.
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