REKINC1980
Shares of Ibotta, Inc. (NYSE:IBTA) have seen a strong public debut, as final pricing and opening day gains mark healthy gains from the preliminary offering range. Ibotta is an interesting business, unique of a business model, as I greatly applaud the pace of growth and substantial profits achieved.
Nonetheless, earnings achievements are demanding, making me somewhat cautious to chase the shares here, but I will keep a close eye on the shares post the offering.
Make Every Purchase Rewarding
Ibotta is a technology company which allows CPG brands to deliver digital promotions to millions of consumers through a single network. The company has attached 2,400 consumer packaging brands to its network with over 800 clients. The company claims that it has returned nearly $2 billion in cash to its more than 200 million customers reach (of which a relative a small portion of active redeemers), since the inception of the business.
The story started with Ibotta’s founder, Bryan Leach, who recognized the opportunities for technology to transform the way in which promotions and advertisements are delivered. The idea was that consumer loyalty should be rewarded, as Ibotta is the abbreviation of “I-bought-a.”
With grocery shopping in the U.S. alone totaling $1.2 trillion a year, every saving counts for consumers which are strapped for cash, something worsened by higher inflation. The company started its first app in 2012, with consumers obtaining cash back from purchase of branded products which they buy at big retails such as Walmart, Dollar General, Kroger, and many more.
The idea is that through the smart usage of point-of-sale data from no less than 85 different retailers, Ibotta is perfectly positioned to match and distribute the right offer, to the right consumer, at the right time, all employing its proprietary algorithms. This has clear advantages for brand owners, as this is an ultimate form of personalized advertising, with consumers reaping real benefits and personalized benefits as well.
Contrary to, for instance, paper coupons, the benefits of this method are better reach with consumers (as an online service), the ability to personalize promotions, fewer frictions in the redemption experience, and lower costs to offer these services.
Valuation & IPO Thoughts
Ibotta aimed to sell 6.6 million shares in a preliminary offering range between $76 and $84 per share. Strong demand meant that the final price was offered at $88 per share, although just 2.5 million shares were sold by the company, as the rest was offered by selling shareholders. This meant that gross proceeds benefiting the company came in at $220 million.
With 30.4 million shares outstanding post the offering, the company commands an equity valuation of $2.68 billion, which includes a net cash position of around $265 million, implying that operating assets are valued just over $2.4 billion.
These valuations should be seen in relation to a $320 million revenue number reported in 2023, with sales up some 52% for the year, aided by the roll-out of the services at Walmart. Following a $110 million increase in total sales, operating profits rose by $96 million to a positive number of $56 million. Amidst lack of interest expenses and a regular tax rate, the company could really post realistic GAAP earnings of $1.40 per share.
The business generated nearly $244 million from its $320 million revenue number from redemption revenues, with advertising and other revenues up very modestly to $76 million. This means that for three quarters of sales, Ibotta is dependent on consumers redeeming their personalized offerings, mainly from 2DC redemption revenues, but lately a growing importance of third-party publisher redemption volume, all related to the adoption of the services by Walmart.
Looking at the active user base of 8.2 million redeems (active on a quarterly basis), the D2C segment was dead flat at 2.0 million in 2023, with growth in the third-party publisher redeemers driven by Walmart. While the 2DC segment is smaller in terms of active redeemers, they tend to be about 4 times as active as third-party redeemers, with (blended) average revenues per redemption being nearly a dollar for the business.
Momentum remained strong, with fourth quarter sales up 50% to nearly $100 million here. For the first quarter, the company has reported preliminary sales of $80.8-$82.3 million, suggesting some 41% growth on an annual basis. While growth slowed down, following the ramp-up of Walmart, operating earnings are solid, seen around $15 million in dollar terms, for very healthy margins.
At this time, shares have risen to $104 per share, pushing up the enterprise valuation to $2.9 billion. This values the business at 9 times sales over the past year, as forward-looking sales multiples likely are much lower. Pegging sales at $400-$450 million, I see no reason why operating profits might not come in around 25% of sales, for earnings at or above $2.50 per share. With net cash holdings seen at $8 per share, the company trades at a demanding nearly 40 times earnings multiple.
Concluding Thoughts
Truth be told is that Ibotta, Inc. is an interesting business, as a current 40% growth rate works down to 7 times (forward) sales multiple, which looks quite decent. Furthermore, the business holds net cash and is profitable already, creating a lot to cheer about.
Somewhat problematic are the risks, and those include general risks like the willingness of publishers to use the services, integrate them into the infrastructure, and pay a relatively steep cut for these services.
The company claims to have facilitated paying back $1.8 billion to consumers, but that is since inception. While we do not know this number per annum, it strongly suggests that the revenues of Ibotta in relation to this number are likely very high, as long-term pressure could reduce this metric, certainly if competition catches up.
All in all, the quality of the services depends highly on the mix and algorithms, making Ibotta, Inc. some kind of algorithm/AI play as well, so I am keen to learn more about the business post the IPO. Following the IPO, we typically see higher stock-based compensation expenses. Amidst all this, I am taking a wait-and-see approach, although with above-average interest here.
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