Olo Sets IPO Price Range

Olo, a fintech startup headquartered in New York City, which specializes in order processing software for the restaurant industry, has announced its preliminary IPO price range today.

This initial public offering is anticipated prior to the IPO of Toast, a Boston-based company valued as a unicorn and operating within a comparable market sector.

IPO Details and Potential Funding

Olo is targeting a price of between $16 and $18 per share. This could result in the company raising up to $372.6 million through its public offering.

The Exchange focuses on startups, financial markets, and investment. It is published daily on Extra Crunch, and a newsletter is available every Saturday.

Profitability and Market Context

Olo distinguishes itself from many recently public companies by demonstrating a track record of both growth and profitability. This makes its upcoming pricing particularly noteworthy.

The profitability of Toast remains unconfirmed. However, given that a majority of venture capital-backed IPOs do not achieve profitability, it is generally assumed that Toast is currently operating at a loss.

Valuation Analysis

We are analyzing Olo’s proposed price range to determine a potential valuation. This includes calculating both basic and fully diluted pricing metrics.

Furthermore, we will assess the company’s revenue scale to understand its overall size and market position.

The Value of Profitability

A key question arises: are investors prepared to offer a premium for companies that are already profitable?

If so, what magnitude of premium is justified? While most IPOs resemble Coursera’s financial profile more closely than Olo’s, this remains a relevant inquiry.

Olo’s Initial Public Offering Valuation

Interested parties can review the latest S-1 filing available here. Initial analysis of Olo can be found here, and details regarding its funding rounds are accessible via Crunchbase.

Olo is aiming for a share price between $16 and $18, with a planned offering of 18 million shares. An additional 2.7 million shares have been allocated to the underwriters. At the high end of this projected range, excluding shares designated for its financial institutions, Olo stands to generate $324 million from its initial public offering.

According to the company’s filings, the aggregate number of Class A and Class B shares outstanding following the IPO is projected to be 142,012,926. Our calculations, incorporating the underwriters’ option, suggest a total of 144,712,926 shares. Based on the latter figure, Olo’s valuation could range from $2.32 billion to $2.6 billion.

However, determining the fully diluted valuation requires further consideration. Including shares associated with currently outstanding, vested stock options increases the total share count to approximately 188,085,714.

When the underwriters’ option is also factored in, the total share count rises to 190,785,714. Consequently, utilizing this latter number, Olo’s fully diluted valuation could fall between $3.05 billion and $3.43 billion, depending on the final share price.

Key Valuation Metrics

• Initial Offering Range: $16 to $18 per share
• Shares Offered: 18 million
• Underwriter Allocation: 2.7 million shares
• Potential Proceeds (High End): $324 million
• Post-IPO Shares (Including Underwriters’ Option): 144,712,926
• Valuation (Post-IPO, Including Underwriters’ Option): $2.32 billion - $2.6 billion
• Fully Diluted Shares (Including Options & Underwriters’ Option): 190,785,714
• Fully Diluted Valuation: $3.05 billion - $3.43 billion

Evaluating Olo's Valuation

The question of whether Olo is priced expensively requires a detailed examination of its financial performance. A review of Olo’s expansion reveals a company experiencing substantial growth in its software revenue streams, alongside improvements in the quality of those revenues over time.

Specifically, Olo’s platform revenues – encompassing both subscription and transaction income from its software offerings – increased from $45.1 million in 2019 to $92.8 million in 2020. Concurrently, the gross margin associated with this platform revenue improved from 73.6% to 84.5% during the same period.

These are positive indicators. When factoring in revenue generated from human-powered services, the company’s overall growth rose from $50.7 million in 2019 to $98.4 million in 2020. This represents an increase of over 94% on a year-over-year basis, with blended gross margins reaching 81%.

Furthermore, Olo achieved profitability in 2020, reporting an operating profit of $16.4 million, a significant turnaround from the $10 million operating loss recorded in 2019.

Considering a valuation between $3.05 and $3.43 billion, is the company undervalued or overvalued? At the lower end of this range, the company’s valuation equates to 31 times its 2020 revenue. The upper end of the range suggests a multiple of approximately 35x.

However, a more precise assessment necessitates understanding Olo’s Q4 2020 revenue run rate, allowing for a comparison with companies listed on the Bessemer Cloud Index. This comparison will help determine whether Olo’s valuation is justified.

Olo reported $30.5 million in revenue for Q4 2020. Extrapolating this figure, the company’s annualized revenue run rate is $122.2 million. Based on this run rate, the valuation ranges from 25x to 28x.

A comparative analysis is now possible. Shopify, as tracked by the Bessemer Cloud Index, experienced 94% growth in the past year. Its enterprise value, when annualized based on its run rate, is currently valued at 34.7x. Therefore, Olo, exhibiting similar growth, appears relatively inexpensive at its present pricing.

While comparisons to Shopify should be approached cautiously – given Shopify’s exceptional performance – investors often rely on comparable companies. In this instance, the comparison does not suggest that Olo is currently overpriced.

Acknowledging potential market fluctuations, a higher initial price range for the company would not have been unexpected.

These findings have positive implications for Toast. Should the unicorn demonstrate comparable economics and growth, it can anticipate a substantial multiple upon its eventual public offering. While that offering may still be some time away, analyzing current market trends is crucial. Toast is reportedly aiming for a $20 billion valuation, and its ability to justify this figure will depend on its financial performance.