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One of the hottest IPOs last week was Olo Inc. (NYSE: OLO), a cloud-based e-commerce platform for restaurants.
The Olo IPO was priced Wednesday and saw strong initial buying interest with an almost 40% pop in price.
The stock, which was priced at $25 a share, got as high as $35 before pulling back at the end of the week.
Now that the Olo has pulled back, what's the case for buying the stock?
Here is what you should know about Olo stock now that it's publicly traded.
What Is Olo?
Olo sells software that helps restaurants provide digital ordering and delivery services. In 2020, takeout and delivery were more important than ever. Dine-in was not an option in much of the country.
However, most people do not realize that even before COVID-19 changed the restaurant business, 60% of orders were for off-premises consumption. More than half of the business was takeout, and that should be the new normal when the pandemic is finally in the rearview mirror.
Although restaurant revenue dropped in 2020 from $863 billion to $659 billion, spending is expected to rebound to over $1 trillion annually by 2024. If the percentage of food consumed off-premises holds steady, over $500 billion worth of takeout orders will be sold.
Olo's software platform provides a white-label ordering platform that allows customers to place orders and pay via mobile, web, kiosk, voice, and other digital channels. It also provides dispatch services that help restaurants get the order processed and delivered to the customer's home or office quickly and efficiently.
There is also an aggregator and channel management solution, allowing restaurants to control and syndicate menu, pricing, location data, and availability of menu items.
Now, let's look at how this has all played out in practice for Olo.
Road to the Olo IPO
So far, Olo has been a strong growth story. Founded in 2005, the company has grown revenue by over 90% annually.
Olo has an impressive customer list, including major chains such as Denny's Corp. (NASDAQ: DENN), Chile's, Shake Shack Inc. (NYSE: SHAK), The Cheesecake Factory Inc. (NASDAQ: CAKE), and other major chains.
It currently has 400 brand customers representing over 64,000 active locations across the United States. Right now, it is helping restaurants to process and deliver more than 1.8 million meals per day.
The pandemic has changed the restaurant business, and some of those changes are permanent. Whether pick-up or delivery, off-premises dining will be the chief driver of growth for the industry over the next five years.
That growth should benefit Olo as a leading purveyor of order and delivery software services.
Does that mean we should buy the stock at current levels?
Is Olo Stock a Buy Right Now?
As interesting a story as Olo is, it's probably not a buy at the current price.
Restaurant software is a crowded and competitive industry, and you can expect there will be new entries. The success of the IPO will bring attention to the industry, and new competitors will emerge into an already crowded field.
While Olo had a successful IPO, we already see the stock pulling back somewhat. On Friday morning, the stock fell below $30 as selling pressure began to exceed buying interest. The deal had priced at $25, which is well above the original price range of $16 to $18, so it looks as if potential buyers have little interest at current prices.
When we consider the valuation of Olo, it is hard to make a case for owning the stock at current levels. The company has revenue in 2020 of $98 million and profits of a little over $3 million. The current stock price values the company at over $4 billion, which is a fairly hefty valuation.
Olo has a good business, but it is also a very competitive business. It has a solid customer base, but the challenge will be to continue to grow that base to include more of the better-known and more widely utilized national chains.
While we do not suggest running out to buy the stock right away, Olo will be a stock worth keeping an eye on going forward. It is a huge industry, and while the market for ordering software is highly competitive, it is also very fragmented. There is no clear market leader at this point, and Olo may have an opportunity to grow into that leadership role.
The pandemic has changed the restaurant industry, and Olo could be a major beneficiary of those changes. However, at current prices, buying the stock is probably not a winning proposition yet.
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