does Expensify deserve a spot in your portfolio? here's the key information you need to know
Expensify is a payments act that is primarily focused on simplifying expense management or
in the company's own words to make expense reports that don't suck i kind of love their mission
statement to use their tools you download their app onto your phone and you can simply take a
picture of a receipt and you've created a digital paper trail for your expense report the company
got it start in expense reporting but it's since traveled to several other areas including travel
leisure and even payroll the company also recently rolled out its own card which will streamline the
entire process of following your expense report and as of the time of this recording the company
has attracted more than 667 000 paying users across the world expensify's business model is 100
software as a service expensify attracts new users by offering a freemium model anyone can go on and
download and use the software for free however if a business wants to start using it they have
to become a paying user and its net retention rate is 119 which means that expensify not only
holds on to their existing customers but gets them to spend 19 more every year most companies that
employ this kind of model have very high customer acquisition costs expensify actually has very low
customer acquisition costs that's because it's primarily targeting the end users themselves
not the businesses we discovered during the pandemic that demand for this product is cyclical
as business travel came to a screeching halt the number of active customers not only stopped
growing but actually declined on the bright side nearly 100 of this company's revenue is recurring
in nature thanks to its software as a service business model focus turning to the company's
moat or its sustainable competitive advantages when we looked for a network effect neither one
of us was able to find one however that impressive dollar-based debt revenue retention rate suggests
that the switching cost to users is very high because this is a software company low cost
production is not a particular advantage that we found either but we do think the company's brand
name expensify is synonymous with the category and that is a competitive advantage for the company as
we'll touch on later there are lots of others who are trying to do the same thing as expensive eyes
so we don't really see counter positioning as an advantage either but we both believe that this
company's moat is expanding over time as seen by its rapidly growing user base let's take a quick
look at the company's financial results when we look at revenue growth we see that growth was
very slow in 2020 as that business travel came to a halt but that it accelerated again in 2021
and has grown at a 31 clip over the last two years like many software as a service businesses
expensify enjoys a nice gross margin of 67 and the odds are good that number could actually move
higher over time too with scale after hovering near break even for two years we've also seen
net income go solidly positive over the last 12 months and what made us both smile when we're
researching this company is that expensify has been free cash flow positive for several years
the company has a fairly healthy balance sheet with roughly 68 million dollars and cash in 52
million dollars in debt however we wish that some of the ipo proceeds had gone to pay down
that debt and while the company does have positive returns on capital because of its net income the
returns on capital are actually low right now over time the odds are good that that number
will move significantly higher as the company continues to scale and focus on profitability
let's take a look at the management team this company was founded by david barrett as he was
looking for a way to give cards to people who are homeless and the idea for expensify sprouted from
that and he is still on board as the company's ceo david barrett and the company's management
team get glowing reviews on glassdoor from the company's employees and when you combine
all insiders together they own roughly one-fifth of this company which is worth at the time this
filming 730 million dollars but is there room for expensive fire to grow well we think the company
has a decent amount of optionality embedded in it yes it started initially by focusing on expense
reports but it's since moving into other areas of expense management now we saw from looking at the
company's net income that it recently crossed that threshold to being profitable but what's
exciting is that there's lots of room for profits to grow faster than revenue moving forward the
company believes that its current addressable market opportunity is nearly 22 billion dollars
of which it's currently captured less than one percent and the company's growth is
almost entirely organic which is a great sign because it doesn't need to rely on acquisitions
to grow expensify has only been public for a few weeks so we don't have a lot of data to go off
of however we do know that it's outperformed the market since it came public and it has reported
earnings one time and it did exceed expectations now given the fact that this is a growth company
that just came public it shouldn't be surprising to see that the company is not using money to buy
back stock is not using its cash to pay down debt and it does not have a dividend that it's paying
so what are the key risks facing expensify's investors first and foremost this is a competitive
industry and it's been highly competitive for many years expensify is going to have to
continue to stand out if it wants to continue to grow on the plus side when you've got over
660 000 paid customers concentration risk isn't something you need to worry about we are also
surprised to see the dilution rate here is pretty low that's primarily because expensify pays its
employees with high salaries and high bonuses but it doesn't have high stock based compensation
while we can't foresee every innovation that's coming down the road we believe that the risk
of disruption is low because right now expensify is the disruptor we also think that the company's
business model and financial statements are pretty straightforward so they're relatively easy for
investors to understand given that the company is headquartered and most of the business takes
place in north america we don't believe there's a high risk for geopolitical reasons there is the
risk of outside forces and that outside force is business travel this company's future is highly
dependent on business travel returning and growing and when we look at the company's valuation we
have to admit that it is extremely high right now the trades for roughly a hundred times free cash
flow and almost 30 times sales so what are the key things for investors to watch moving forward
number one keep an eye on paid users this is the thing that drives the company's revenue so we want
to see this number moving up rapidly second most sas companies reveal their net retention rates
expensify calls that their seat retention we want to see that remain solidly above 110
third keep an eye on the company's balance sheet while the company does have more cash than debt
we want to see that balance sheet continue to improve over time which it should because it's
producing free cash flow that it's positive how to expensify score on our investing checklists
for me this got a 69. that low score is primarily because the company is still new to the public
company i actually think this is a very investable idea and my framework is less concerned about how
young or old the company is on the public markets it got an eight and a half the main thing that
drew back that score was the fact that the company lost paid users during the pandemic was this video
helpful if so give us a thumbs up and let us know in the comments section below brian's out