Updater priced for perfection

Australian company Updater (ASX:UPD) is trying to profit from ‘redefining the moving experience’ in the US. 

As the stock market is an anticipatory system, stock prices reflect investor expectations at any point in time. 

Just because a company and its industry is perceived to have a great future doesn't make that company a great investment, as this will usually be already reflected in its price. 

And judging by its $280m enterprise value despite generating only US$600k revenue in 2016, investors currently have very high expectations for Updater (ASX:UPD).

Updated listed on the ASX (ASX:ASX) in December 2015 and its mission is to ‘redefine the moving experience’ for the 17m households that move each year in the United States.

Revenue not a primary objective

For the moment, though, despite its $320m market capitalisation, the company is essentially still a start-up. Its 2016 annual report notes that its primary objective isn’t generating revenue but instead its Estimated Market Penetration of Moves Processed (management likes capitalising generic terms).

Updater has spent US$20m developing a software system that it sells to real estate companies and brokers on a subscription basis. These companies customise the system for their customers, helping them to complete all the irritating moving-related tasks such as diverting mail, updating utility providers, pay TV providers and so on.

Updater has agreements with 650 US real estate companies including Greystar Real Estate Partners, the largest apartment management company in the US with over 400,000 units across 1,800 properties. Since launch, more than 1m movers have opened accounts using Updater’s system.

These agreements are Updater’s only current source of revenue but its goal is to increase its market penetration to 15% of yearly moves. It estimates more than 9% of all moves in the US utilised its software via its partners in the first quarter of the 2017 calendar year, up from 3.1% in the first quarter of 2016, so this seems a realistic goal.

Once it has reached sufficient market penetration, management believes Updater will become an attractive way for national US-based businesses to market their products and services to Updater’s users.

In turn, this should make the system even more attractive to movers and real estate companies, allowing the company to generate significantly higher revenue and, hopefully, profits and cash flow.

By offering businesses the opportunity to advertise their products or services – labelled Business Products by management – to new movers on a targeted fashion using its software, Updater potentially increases the return on their marketing dollars. Updater plans to charge these businesses for long term access to its system through a subscription model.

To that end, it has entered into a number of pilot programs to test the viability of its business model. A recently completed pilot program returned favourable results: households who were about to move were offered the chance to purchase home, renters and auto insurance in their new locations and did so at a 93% higher rate than those who weren’t given a similar offer. However, because the company didn't disclose the rate at which the latter purchased insurance, it's difficult to estimate the potential revenue that could be generated by Updater. 

Updater hopes to start rolling out Business Products across its wider system by the end of calendar 2017.

While it burnt through around US$5.5m in cash last year, a capital raising in September means it has US$30m in cash on its balance sheet. This is a decent buffer as it tries to prove its business model and start generating material revenue but further capital raisings are possible.

Good value?

As the insurance pilot suggests, Updater may have the potential to generate decent profits from opening its system to utility companies, insurance and financial companies, among others. Particularly if it dominates the moving space.

With its first mover advantage allowing it to rapidly increase market penetration, US$20m invested in developing its technology, and existing relationships with customers – including integrating its systems with theirs – there are some barriers to entry for competing firms.

Its inherent scalability, operating leverage and potential annuity-like subscription revenue are also positives.

Yet at current prices the market is asuming this hoped-for future is all but assured. 

Perhaps investors’ expectations will come to pass, or even be exceeded. However, Updater’s as-yet-unproven business model and highly speculative nature means we’ll watch – albeit interested – from the sidelines.