It has been a bit of a sluggish start so far for the IPO market in 2014, especially for investors looking for new high-growth opportunities. The malaise in the broader markets has certainly played a role in that. With that said, there is one pure growth IPO that the market has churned out that I feel is worth taking a close look at, once it cools off a bit.
Its 5.4 million share IPO, led by Morgan Stanley, BofA Merrill Lynch, and JP Morgan, priced on January 24, coming in above expectations at $17 vs. the $14-$16 expected price range. It popped higher when it opened for trading, starting at $21.21, and has since cruised higher, trading as high as $27.82, good for a 64% gain.
World’s Largest Online Marketplace For Family Care
CRCM is the creator, owner, and operator of an online platform that helps families find and hire child care, senior care, special needs care, pet care, tutoring, and housekeeping. In business for about six years, the company says that it is by far the largest online provider of family care with more than 9.7 million total members.
Besides its market leading position, what also stood out about CRCM is its business model. Specifically, it generates revenue from multiple subscription streams. For its consumer matching service, access to the platform is free for basic members. But, in order to connect directly with caregivers and use the enhanced tools, like background checks, family members have to pay a monthly, quarterly, or annual subscription fee. Simultaneously, caregivers pay a subscription fee for priority notification of jobs, messaging services, and to perform third-party background checks on themselves.
Additionally, in August 2012, it acquired Breedlove & Associates, a provider of household employer payroll, tax, and compliance services. Through this newly acquired consumer payment offering, families can electronically pay a caregiver, and they can also subscribe for tax preparation services through its Care.com HomePay product.
Impressive Revenue Growth, But Not Profitable
Looking at CRCM’s recent financials, the obvious standout metric is its revenue growth, which has been impressive. From FY10 to FY12, its revenue has grown by a CAGR of 94%, primarily driven by its consumer matching service. Hand in hand with its revenue growth has been the growth of its member base. Since September 30, 2010 its members grew from 1.9 million to more than 9.1 million as of September 28, 2013.
There are obvious blemishes, too, however. As a young online company, it is not surprising that the company is not yet profitable as it heavily invests in marketing and technology. With that said, I would prefer to see its losses shrinking, or at least stabilizing. Unfortunately, its operating losses have been widening and the company’s operations have been burning cash. It is not even close to profitability on the more lenient Adjusted EBITDA basis.
There are a couple main culprits here. First, over the first three quarters of 2013, its cost of revenue surged higher by 94% as its compensation expenses grew due to expanded headcount as a result of its acquisitions. Second, there was a sharp increase in selling and marketing expense, which spiked by 57% to $43.9 million.
Valuation Was Compelling
In addition to the strong growth rates, solid underwriters, and small float, an attractive valuation was another positive attribute in its corner. At the mid-point of the proposed price range, and assuming 50% revenue growth for 2014, CRCM had a 1-year forward P/S of roughly 3.8x.
Given its meteoric rise since its pricing, valuation metrics have obviously become pricier. At the moment, it is trading with a 1-year forward P/S of about 7x, which is a bit lofty. If its sizable cash balance ($5.30/sh) is excluded, though, and an EV/S basis is used, its valuation looks more enticing at 5.5x.
Conclusion
CRCM’s debut has been quite impressive in the face of a challenging stock market. And, there is good reason to be excited about this deal. Not only has revenue been growing at high-double digit rates, but, its opportunity for further growth is enormous given the sheer size of the addressable market – estimated by CRCM to be about 42 million households in the U.S. alone.
What I also like about CRCM is that it generates revenue from multiple subscription streams, rather than from advertising, like many other online services. It has a “real” business model, striving to solve a real challenge facing millions of people.
Lastly, although its valuation is not as attractive as it once was, I still wouldn’t characterize it as egregious at this point.
It’s not a perfectly clean story, though. Profitability is nowhere on the horizon and CRCM is burning cash. I also wouldn’t jump right in after this launch higher, especially considering the weakness in the broader market. However, I do feel it is worth keeping on the radar should it pull-back appreciably on some notable profit-taking. The longer-term growth potential makes this one of the more compelling IPOs to come through the pipeline in recent months.
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