A tech stock that's flying under the radar

Just because a company is large and well-known today doesn't necessarily mean it'll remain that way into the future. Investors in shares need to overcome familiarity bias and focus on the future, what is to come rather than what has happened in the past.

After 12 years of "value" investment strategies underperforming "growth" in the US, naturally much has been made as to whether the trend is sustainable or likely to see a reversal.

But the story isn't as simple as value versus growth. It appears to be equally as much about "low-quality" versus "high-quality" businesses.

The question many value investors need to continually ask themselves is, "is this quality business truly exhibiting "value", or is this business simply "junk" and cheap for a reason?".

The fact is that in many cases the quality businesses exposed to capital-light growth sectors have continued to demonstrate strong momentum in both the balance sheet (quality) and share price. They have been outperforming those "cheaper" businesses in more traditional capital-heavy sectors.

Many quality growth businesses that have emerged in recent decades are capital-light in nature and have management teams that have reinvested revenues to drive future growth at the expense of short-term earnings.

Why Pushpay fits the bill

Pushpay Holdings (ASX: PPH) is a cloud-based online payment solution that provides a donor management system, including donor tools, finance tools and custom community apps to religious organisations, non-profit organisations and education providers in the US, Canada, Australia and New Zealand.

Founded in 2011, Pushpay operates under a SaaS (Software as a Service) model with a heavy emphasis on churches. As of March 31, 2020, Pushpay maintains a customer base of 10,896 churches and an annual revenue retention rate of 100%. While Pushpay is listed on both the Australian Securities Exchange (ASX) and New Zealand Stock Exchange (NSX), 98% of its customers are in North America and Canada.

Covid-19 and recent performance

In the wake of Covid-19, Pushpay performed well as the global pandemic forced churches to transition to online service and tithing. Such changes accelerated both Pushpay's operations and expansion, as evidenced in the share price soaring 213% since March 2020.

Pushpay's acquisition of Church Community Builder, a US-based leading provider of church management systems (ChMS), in December 2019 proved to be "a gift from above". The acquisition complemented Pushpay's custom community app and donation solution, such that online churches could manage administrative affairs and ensure church announcements, sermon streaming, and mobile giving were maintained throughout quarantine period.

This new integrated system for churches thrived during the phase of self-isolation such that Pushpay's total revenues increased 32% from US$98.4 million to $US129.8 million last financial year. With social distancing restrictions expected to continue, we're encouraged by Pushpay's prospects and even more by their gross operating margin jumping from 60% to 65% for the year ended March 2020, and total operating expenses improved by 13 percentage points, from 65% to 52% as a percentage of operating revenue.

Sustainable competitive advantage 

As mentioned above, Pushpay's integrated system for churches poses as a powerful competitive advantage that differentiates them from other payment process services like PayPal and Stripe.

In addition to Church Community Builder, Pushpay enjoys integrations with services commonly used by many churches such as Planning Center, Rock RMS, Servant Keeper, Focus Missions and Intuit.

By maintaining expansive partnerships and integrations, Pushpay gains exposure and access to an extensive customer base across US churches. Pushpay's most recent annual report states that their acquisition of Church Community Builder increased customers by 2716, where 1442 were mutual customers. We view this as a positive indication of Pushpay's strong potential in procuring new customers and cross pollinating with partner services to produce mutual customers that bring mutual benefits.

We are also encouraged by Pushpay's total processing volume growth rate, as a key component of their revenue is the processing fee of 1.8%.

In FY20, total processing volume increased by 39%, amounting to US$5 billion, which is expected to grow more as Pushpay states most churches see a 76% growth in recurring givers in their first six months without losing current givers.

As such, we believe there is a direct incentive for churches to subscribe to Pushpay's products as it leads to more regular donations from the church community. Therefore, despite paying for monthly subscription and donation processing fees, we believe churches would still be inclined to subscribe to Pushpay as the additional costs would be offset by some 76% growth in recurring donations. Thus, we hold a positive outlook for Pushpay as their well-grounded business model leads to systemic revenue growth.

Alignment with shareholder interest

At Medallion Financial Group, there is a strong emphasis on the founder and management team's involvement in a company, as we believe it increases the likelihood of management's interests aligning with shareholder interests. Hence we find co-founder Chris Heaslip and the directors' equity stake, amounting to 49.7%, encouraging - it suggests there is a vested interest for management to grow the company.

Following Pushpay's acquisition of Church Community Builder, Chris Fowler, previously chief executive of Church Community Builder, was appointed as visionary and executive director. As Fowler holds 26 years of business experience and serves on the elder board of two churches including New Life Church, a mega-church with more than 10,000 members, we believe his extensive network and experience places Pushpay in a favourable position.

Pushing forward

Considering Pushpay's recent success and prospects, it still seems to be under the radar relative to rapidly growing tech stocks such as the WAAAX and ZEETs. We view it as a great opportunity to take a position in a business that is rapidly growing their customer base, revenue and margins, both organically and through targeted acquisitions. While Pushpay's customers are predominantly North American, it is important to consider the prospects of global expansion given the world Christian population is 2.3 billion.

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