Not a Buy, but EverQuote Likely Found a Short-Term Bottom (EVER)

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2022 has proven to be an incredibly difficult year for smaller companies. Wild swings in both consumer and corporate demand have left many previously high-flying growth stocks in limbo, least of all EverQuote (NASDAQ: EVER).

EverQuote, an insurance marketplace that primarily markets auto insurance products to online shoppers, saw last year’s double-digit growth rates stall and reverse into a decline this year. As insurance companies struggle with higher claims and lower end-user demand, they’ve focused more on profitability and less on customer acquisition — hurting marketplaces like EverQuote. Year to date EverQuote has lost ~35% of its value (which is milder than most growth stocks, although EverQuote also spent much of 2021 in the dustbin while other growth peers rallied):

Data from YCharts

I’ll get to the point here: I am now neutral on EverQuote after previously declining. Several factors are driving this upgrade:

  • Trends appear to have bottomed out. EverQuote’s most recent quarterly results, which we’ll discuss in the next section, show that growth rates in its key auto industry are flattening out and not declining any further; In addition, management has also issued positive tones on the underlying trends in the auto insurance industry.
  • The traffic keeps growing. Although EverQuote has reined in marketing spend, the company continues to see double-digit traffic and requests for quotes. While revenue is down slightly year over year, the fact that EverQuote still retains good traction with online web buyers bodes well that its marketplace will be well-positioned once auto insurers start looking for new customers again.
  • EverQuote remains profitable on an adjusted EBITDA basis, which could make it a sleeper acquisition target. Although the revenue crisis has weighed on profitability, the company has maintained Adjusted EBITDA profitability since 2019. That, coupled with the company’s relatively low enterprise value, could make it an attractive target for a smaller PE firm.
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With all that said, there’s still a lot of uncertainty on the horizon for EverQuote. It depends a lot on how aggressive auto insurance carriers are in marketing, and we haven’t seen any signs of a full recovery yet. Additionally, the company’s ambitions to expand into other non-auto categories appear to be faltering as those categories post double-digit year-over-year declines — diminished by the rising star of more popular brands like Lemonade (LMND), which offers its direct home/ Tenant insurance instead of running a marketplace.

Overall, I don’t see a great future for EverQuote on its own, and I’m primarily neutral on the possibility that Adjusted EBITDA will be seen as an acquisition commodity. Don’t rush to buy this stock: It’s wait and see at best.

Download Q3

Now let’s take a closer look at EverQuote’s latest Q3 results. The earnings summary for Q3 is shown below:

EverQuote Q3 results

EverQuote Q3 Results (EverQuote Q3 Earnings Release)

EverQuote revenue declined -4% year over year to $103.2 million. While that sounds like bad news, note that the company beat the Wall Street consensus of $93.1 million (-13% YoY) by a whopping nine points. Also note that in Q3 the company had expected momentum in the auto insurance industry to deteriorate in Q3.

This obviously did not happen. Automotive sales declined -2% yoy in Q3: vs. -3% yoy decline in Q2:

EverQuote Earnings by Industry

EverQuote Earnings by Industry (EverQuote Q3 Earnings Release)

Jaymes Mendal, the company’s CEO, noted on the third-quarter earnings call that EverQuote is beginning to see signs of normalization in auto insurance as airlines have managed to raise rates (key points highlighted):

The situation on the car insurance market remains unclear. In August, we began to see the first major airline return to more normal historical spending patterns as they began to bring rates and profitability back to desired levels. While this positive momentum resulted in better than expected performance in the third quarter, Hurricane Ian, expected to be one of the largest loss events in history, put significant pressure on the market and airlines’ marketing spend through year-end. As a result, We continue to expect the bulk of the auto recovery to occur in 2023.

Despite a challenging environment, we performed well in the third quarter and continued to make progress on several fronts across our business. On the consumer side of the marketplace, we grew consumer volume by 27% year-over-year thanks to the strong performance of our customer acquisition teams. On the supply side of our marketplace, intermediary-centric distribution channels continue to show relative strength and resilience. Feedback from multiple carrier partners shows that EverQuote is the largest and best performing referral partner for their local agents. Moreover, data suggests so EverQuote has been gaining market share since the downturn began and we continue to blend advances on longer-term strategic initiatives.”

It’s worth noting that despite a sales decline, a 27% year-over-year traffic growth suggests that the EverQuote brand continues to gain visibility among consumers, which positions the company well when auto insurance companies’ budgets are more fully funded.

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From a profitability perspective, EverQuote’s Adjusted EBITDA declined -2% year over year to $2.0 million but remained positive — margins declined slightly to 1.9%, down 60 basis points from 2.5% in the year-ago quarter.

EverQuote Adjusted EBITDA

EverQuote Adjusted EBITDA (EverQuote Q3 earnings release)

It’s worth noting that EverQuote has maintained profitability based on Adjusted EBITDA since 2019. The ability to maintain that level of profitability – especially in tough years like this – can be attractive to a potential acquirer.

EverQuote Adjusted EBITDA

EverQuote Adjusted EBITDA (EverQuote Earnings Deck)

The central theses

With better-than-expected Q3 results and a potential rebound in auto insurance, EverQuote’s runway is looking healthier than I originally anticipated. However, it’s unclear how EverQuote plans to return to growth or grow its bottom line beyond its current low single-digit margins. Unlike other smaller companies, which have faced significant revenue losses this year, EverQuote hasn’t announced any major layoffs or cost-cutting plans. Be careful here.

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