You've likely never heard of recently-listed tech star PushPay FPO NZX (ASX: PPH), but it is certainty a company to start watching.
PushPay facilitates secure, mobile donations or payments and is highly focused on the U.S. faith sector or churches. That's no small niche. The company notes there are upwards of 340,000 churches in the U.S. and in 2014 US$115 billion was given to religious organisations.
Did you say 'hyper-growth'?
New Zealand founded PushPay is headquartered in the U.S., but listed on the ASX last month as it raised more cash to fund growth, growth which has been so rapid that PushPay has been classified a 'hyper-growth' company.
Hyper-growth is defined as growing from $1 million to $10 million of annual recurring revenue in five quarters or less. PushPay has shot past that point and earlier this year announced it expects to continue growing 'Annualised Committed Monthly Revenue' (ACMR) from NZ$10 million to NZ$100 million (expressed as US$72 million) in an incredible 28 months. Its target for this result is December 2017.
Compare this to the 42 months achieved by cloud accounting company XERO FPO NZX (ASX: XRO) and we get a picture for just how 'hyper' the growth is.
PushPay has just hit ACMR of US$34 million in the September 2016 quarter, and it makes for an intimidating graph:
The ACMR comes from a combination of monthly subscription fees (usually based on the number of church attendees) and volume fees (a percentage of total donations through the app).
From this PushPay pays third party costs as expenses (including hosting, infrastructure and bank Interchange fees), but currently generates a gross margin of "greater than" 55%.
Does it come with any risk?
Of course we can't have outstanding growth without some risk.
Pushpay will continue to burn cash in the near term as it makes a grab for market share, so like many growth stories an investment today is very much buying rights to the company's future earnings. With that comes higher uncertainty that they may not eventuate.
PushPay has shown great ability to beat growth expectations to date, but there is no denying that the wider digital payments market is incredibly crowded (and well overdue for a shake down in my view). PushPay is somewhat differentiated by its focus on mobile and its non-point of sale application, but given the potential size of the pie it's fair to assume that competition will try to develop similar offerings.
But is the price right?
With negative cash flows and an aggressive growth profile, nailing down a static view on value isn't easy. Looking at a ratio of Enterprise Value / recurring revenue, PushPay looks slightly more expensive than Xero. This is justified, in my view, by its faster growth, albeit with a lower gross margin.
To me, at its current share price of $1.65, PushPay looks reasonable value for a company which has established its strategy, while quickly covering its customer acquisition costs and successfully slotting growth goals. However, it does have the uncertainty of not being profitable, which won't be every investors' cup of tea.
