How lockdowns saw the Pushpay share price triple
Like many aspects of life in 2020, churches were forced to undergo radical changes in order to keep operating in a COVID-19 world. Masks are the norm and often mandatory. Buildings that can seat thousands are limited to hundreds, when they can open at all. Booking a ticket is essential. Singing is out and promoting your sanitisation practices is in.
Many business sectors have had to rapidly transition to technology solutions and the faith sector has been a strong adopter of this trend. Services are streamed online. Prayer meetings take place over Zoom, and giving is done digitally.
Pushpay (ASX:PPH) was founded in 2011 by two young Kiwis who thought that making a donation should be as easy as downloading a song on your phone. So they built an app to make giving a simple experience. In the year to March 2020 that app processed US$5 billion in donations with Pushpay clipping the ticket each time.
And then along came COVID. Initially the stock sold off heavily. In addition to the general market sentiment, there was the concern that giving is a discretionary transaction. With unemployment skyrocketing and people needing to tighten their belt, giving may have been one of the first things to go. Further with people unable to attend church in person would they defer giving until they were back in the building.
But as it turned out, like many technology companies, Pushpay was in a perfect position to capitalise on the disruption. Churches rapidly pivoted to digital solutions and that included promoting digital giving. Pushpay was there to help churches maintain engagement with their members and also help them transition from giving via cheque to giving digitally. They generate the vast majority of their revenue from the US faith sector, where physical means of giving such as via cheques have dominated.
And it has worked. Transaction processing volumes increased nearly 50% in the six months to September 2020 to US$3.2 billion. Management guidance for 2021 earnings issued in May was US$48 - $52 million. They have since upgraded that three times with the latest revision issued this week, for US$56 - 60 million.
So how has the share price responded? From mid March to late June, the price tripled, but it has since retracted over 30%. The main reason for this seems to be a changing of the guard, which has unsettled investors. The original founders and early investors have now sold down the majority of their large stakes, reaping hundreds of millions of dollars in the process. They have also stepped down from the board and there have been a number of other changes to the board's composition.
The founders may have just decided to put their feet up and enjoy their fortunes, however there is always the concern that they have lost confidence in the growth prospects of the business.
Bruce Gordon who moved from Chairman to interim CEO 18 months ago, is being replaced by a new CEO, Molly Mathews. Mathews has been with the business for four years and Gordon will also remain on the board so that should provide some stability in the upper ranks.
Start-up technology businesses are all about building enough scale that they can then reap the benefits of operating leverage. In the last two years Pushpay have crossed that threshold from building scale to reaping the benefits. Gross margins have gone from 54% to 68%. Earnings have gone from negative to over 30% of revenue and cash flows have turned from negative to positive and growing strongly.
Pushpay have a track record of always meeting and often exceeding their guidance. With relatively bullish assumptions about revenue growth, the current price would appear to represent about fair value. That said, there are many uncertainties, including the longer-term impacts of COVID on the US economy, the impact on digital giving as churches return to in person services, and the changing of the guard in terms of cornerstone investors, the board and senior management.
I last wrote about Pushpay in July 2019, and those who put their faith in the business have been well rewarded since then. If new CEO Molly Mathews can maintain the performance of her predecessors there may still be plenty of upside remaining.
The author's related parties have holdings in PPH.
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