One of the market’s hottest small-cap tech stocks has been EverQuote (NASDAQ:EVER). The company’s core business, which centers around creating an online marketplace for matching insurance buyers with insurance sellers, has gained significant momentum over the past few quarters as the entire insurance transaction process has increasingly shifted into the digital channel.
Throughout 2019, EverQuote reported 20%-plus revenue growth quarter after 20%-plus revenue growth quarter. The stock roared from $4 in late 2018 to $40 today.
You read that right. EverQuote stock is up a whopping 900% in just over a year. Naturally, the question now is: can the big rally last?
I have my doubts. EverQuote is in the right market, at the right time, with ample growth drivers to sustain big growth. But, there are risks. There’s lots of competition in the market. Barriers to entry are low. There’s some red flags surrounding the company’s big growth surge this year and shares are far from cheap.
As such, I wouldn’t be chasing the rally up here. There’s simply too much downside risk, and not enough upside potential.
EverQuote Looks Good
From a high level perspective, EverQuote looks like a really good company with a really smart management team and a ton of room to grow over the next few years.
The company has created an online insurance marketplace which leverages big data and machine learning to match insurance buyers to insurance sellers. On the consumer side, they provide a platform for prospective insurance buyers to fill out a quick questionnaire online, and immediately be matched to a wide array of insurance sellers. On the insurance provider side, EverQuote sells high-quality leads to providers by leveraging its robust pool of consumer insurance data.
It’s a win-win system. Consumers win because they get matched with the best policies and save money. Providers win because they reach prospective clients and convert some of those clients into paying customers.
Over the next several years, consumers will increasingly shift their insurance shopping into the digital channel. As they do, insurance providers will increasingly allocate more spend into the digital channel. EverQuote is at the heart of these two secular pivots. Consequently, over the next few years, the company’s insurance request volume and revenues should roar higher.
That’s especially true considering that U.S. insurance providers spend about $8 billion per year on advertising. EverQuote is set to report about $250 million in sales this year. Thus, at just ~3% penetration into its addressable market, EverQuote has plenty of room to sustain big growth for a lot longer.
Critical Challenges Could Stunt Growth
Although EverQuote’s business model is positioned for big growth over the next few years, some critical challenges could ultimately slow this company’s robust growth momentum.
First, the markets in which the company operates are exceptionally competitive. EverQuote is one of many online insurance marketplaces out there. They are also one of many insurance lead generation companies out there. Sure, the company has a ton of data to help buffer against this competition. But at just 5.5 million quote requests last quarter, EverQuote’s first mover and data advantages aren’t that big.
Second, the barrier to entry in this market is very low. If the online insurance market does gain momentum over the next few years, it will attract a plethora of new players. Many of those players will likely be big fish with deep pockets. Consequently, there is limited clarity here for EverQuote to remain one of the nation’s biggest online insurance marketplaces.
Third, there are a few red flags surrounding the sustainability of the company’s big growth. Namely, consumer reviews of the service are far from glowing, third-party web traffic data implies that Everquote.com is actually seeing traffic declines, and insiders are selling left and right.
Fourth, even if everything goes right, potential upside in EverQuote stock seems limited. Aggressively assuming 20%-plus revenue growth and huge margin expansion, my modeling suggests that $2 in earnings per share is doable by fiscal 2025. Based on a software sector average 27-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for the stock of $37.
Bottom Line on EVER Stock
If EverQuote stock were cheaper and bigger, I’d say go ahead and buy the stock as a pure-play on the pivot towards online insurance transactions.
EVER stock isn’t cheap, though. And it’s not that big. Ultimately, valuation friction and lack of size to fend off competition could short-circuit the stock’s big rally.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.