Description

 Last year, Alta Fox Capital put out an excellent presentation titled ‘The Makings of a Multibagger’ (link at end of write up). The study looked at companies that achieved greater than 350% total shareholder return between 2015 and 2020, domiciled in North America, Western Europe and Australia, between $150mn-$10bn market cap, with the goal of identifying common threads amongst this subset population.

I highly recommend going through the presentation in full. In summary, Alta fox concluded an optimal screen for multi-baggers would look for the following:

·         Country: Countries like UK, Sweden, Germany  Norway and Australia were over-represented in the subset (for example, Australia accounted for 5.1% of population excluding TSR>350% requirement and over 11.5% of subset when re-inserting TSR as a criteria), compared to US that was under-represented. Alta fox attributed this to countries that. like the US, benefit from strong rule of law, high education and economic performance, but without the army of small-cap specialists picking over the opportunity-set.

·         Industry: Tech and healthcare were over-represented in the subset. (eg, Tech was 18% of investable universe and 34% of outperforming subset). Altafox attributed the outperformance in tech due to growth opportunities, low unit costs, high gross margins and operating leverage.

·         Size: Companies below a market cap of $2bn were over-represented and comprised 84% of the subset, which Atla fox attributes to lower analyst coverage, institutional ownership and typically greater proportion of untapped TAM.

·         Barriers to entry: Alta fox also noted that 80% of the businesses in the high performing subset had moderate-to-high barriers to entry (qualitatively assessed).

Airtasker (ASX: ART), a ‘moaty’ online marketplace for local services, headquartered and listed in Australia with a market cap of ~US$300mn, ticks almost every box.

Airtasker – history to date

o   Airtasker is Australia’s leading digital marketplace for local services, connecting people who need work done (‘customers’), with people who want to work (‘taskers’). Airtasker is an almost infinitely horizontal marketplace (meaning customers can specify whatever they want outside of certain restrictions like sex and cheating on school assignments), although currently the majority of tasks are related to flat-pack furniture assembly, removal services and other home services (cleaning/gardening)

o   Airtasker was founded in 2012 by friends Tim Fung and Jonathan Lui on the simple premise that busy people will pay someone else to run their errands. The idea came to Fung after asking a friend with a truck to help him move house. He wondered why we ask friends and family to do these jobs when so many people, potentially more skilled, would be looking at ways to make money and realized it was largely due to trust, and a digital marketplace could solve for that.

o   Fung managed to get VC funding from Exto Partners in 2013. It was initially slow going, given the chicken and egg nature of building a marketplace. They found that signing up taskers was straightforward because it was a rockstar proposition (no listing fee, only success fee on completion of task, so signing up was essentially a freeroll). However, they looked to increase the demand side and struck a deal with Seven West Media in 2016 (one of Australia’s leading traditional media organisations). It was an equity investment, but partly structured as media contra arrangement, so Seven would use its media business to promote Airtasker. Fung believed it was the most successful move in the company’s history, with a hugely successful campaign turning Airtasker into a household name. They launched their famous ‘Like A Boss’ campaign, which saw immediate 35% week on week growth in the aftermath.

§  ‘Like a Boss’ Ad - https://www.youtube.com/watch?v=FaLIpG26wCk)

§  Example of advertorial on morning TV - https://www.youtube.com/watch?v=yAi-g0OQlyU

o   Between 2015 to 2021, Airtasker GMV and revenue CAGR have grown by over 88% and 100%, respectively.

Source: Airtasker IPO prospectus (note: Actual GMV and revenue for FY21 came in slightly above management estimates)

o   As at FY21, Airtasker has 410k unique paying customers, who use Airtasker on average 1.9x per year, with an average task value of $189.

o   Airtasker’s average take rate and gross margin is broken out as below. Airtasker’s light-touch automated model allows for outstanding gross margins (no direct sales staff , little handling on transactions).

Source: Airtasker IPO prospectus

o   Airtasker IPO-ed on the ASX earlier this year. Interestingly, Tim Fung and Exto did not sell any shares into the IPO. The major exit was by Seven West Media, which sold its ~50mn shares to new investors. Based on press reports, it appears that Seven West Media was liquidating its entire venture portfolio in order to pay down debt load associating with its struggling core traditional media business. 

How Airtasker works

To demonstrate how Airtasker works, it is probably easiest to illustrate with an example. Let’s say I’m looking to get some IKEA furniture assembled.

·         I post the task on the Airtasker platform describing the task I need done, required date/time and a budget. To give me guidance on how to task the price, I can both consult guides that Airtasker puts out, as well as browse completed tasks that are similar to what I’m looking to get done and see how they were priced.

·         I receive offers from various Taskers in a standardized format. They can pitch me on their appropriateness for the task and also give a price indication on what they are willing to complete the task for. I can look at each tasker’s profile to determine the appropriateness of their skill-set, experience and reliability. To help me make my decision, I can see their ratings (five star system), written reviews from past customers and read more about their individual qualifications and experience. Taskers can also build out their profile and apply for badges (ie, certified plumber), with a third-party verifying they have the appropriate certification, and thereby improve profile credibility. Airtasker refers to this as the tasker’s reputation passport, and can include information as basic as police checks and social media profiles to accreditation for various licenses and portfolio of past work.

·         I choose a tasker and the amount offered is deposited into a secure Airtasker pay account (third party escrow). Once the task is completed, the tasker will send a request to release the payment. I then confirm the task is completed and this releases the funds from the escrow account. I can then leave a star rating and review for the Tasker. If I experience any issues, I can get in touch with Airtasker and they will adjudicate on any potential disputes between me and the tasker.

·         The Tasker receives the payment, minus Airtasker’s service fee. Note this is currently Airtasker’s only form of revenue (no listing fees) and is contingent on successful completion of task. The service fee ranges from 10-20%, and is tiered on a sliding scale, based on tasker earnings in previous thirty days (see below table)

Source: Airtasker IPO prospectus

Key Investment Strengths

·         Attractive digital marketplace characteristics: Benchmark Capital’s Bill Gurley is a prolific investor in digital marketplaces. When evaluating these businesses he looks at ten factors (link at end of write-up), which I’ll discuss below and then evaluate Airtasker on each factor.

o   New experience vs Status quo: With Airtasker the delta of the new experience is substantially better than incumbent. Even when only looking at local services where clear alternatives exist, a customer would need to i) research providers/seek recommendations from friends+family and ii) call up various service providers, seek to get a quote and arrange a time of mutual convenience to perform the task. With Airtasker, you simply put the task you want, when you want it done and rough budget on the slick mobile app (4.8 rating on 127k reviews on Apple App store) and the various service providers come to you with quotes.

o   Economic Advantages vs status quo: Several of the tasks on Airtasker exist on the part of the skills spectrum of where getting a fully qualified professional is probably overkill (ie, no need for a professional electrician to change a light bulb, professional chef to do meal prep, carpenter to assemble flat pack furniture or certified plumber to unclog a drain). All that’s needed is someone who is handy, trustworthy, lives nearby and has some spare time. For the customer, this means the ability to save substantial sums on having to pay the full freight for a bona fide professional. For the tasker, in several cases the going rate can still be lucrative compared to their alternatives (and the ability to pick and choose when to work is particularly helpful for students and other part timers, who can work around other commitments).

o   Opportunity for technology to add value: Taskers can screen for available tasks within a certain radius of their location. AI/ML ensures that taskers are given appropriate tasks when searching for work. The reputation passport for taskers allows customers to efficiently screen.

o   High fragmentation: Given Airtasker is a peer-to-peer marketplace, it scores high on this measure. There is extremely high fragmentation on both sides of the marketplace (taskers for the most part aren’t even businesses, and when they are, they are typically quite small).

o   Friction of supplier sign-up: Unlike some comparable home services marketplaces like Hi-Pages, there are no listing fees on Airtasker – the only fee airtasker charges in on successful completion of a task. Therefore taskers don’t need to perform a cost-benefit analysis as to whether the Airtasker channel is worthwhile for customer acquisition. Also, there is no screening of taskers – Airtasker gives the information and tools for customers to do so, in a more market-based and light-touch, scalable approach.

o   Size of the market opportunity: Airtasker estimate Australian local services market is $52bn, whilst total local services in target overseas markets is almost $600bn (mostly USA). The competitive intensity varies across verticals, but whichever way you slice it there is a lot of market to go after, relative to FY21 GMV of $153mn

o   Expand the market: Gurley also likes marketplaces that expand TAM for the industry. Back in 2014, he famously critiqued Damodaran’s Uber valuation (Damodaran derived a $6bn valuation vs Uber market value of $17bn), citing that the main issue was Damodaran used a static TAM based on historical taxi and limousine market, and wasn’t accounting for potential massive increase in demand elasticity that lower prices and smoother experience would result in. Similarly, Airtasker believe that simply looking at current household spend on local services may result in TAM underestimation due to customer problems that to date have possibly either been ignored or left as unsolved problems. Airtasker refer to this as the long tail of services, given the infinite horizontal nature of the marketplace. They also give examples of new verticals that may have been facilitated by Airtasker, such as flat pack furniture assembly, drone retrieval services and spider removal services.

o   Frequency: This would be a major weakness of the Airtasker platform, given each unique customer only uses Airtasker ~2x per year. If you combine low frequency with a fairly monogamous relationship between customer and tasker (ie, like, say you found a hairdresser and exchanged details after first visit), there is a risk of being disintermediated and people go off the platform. In fact this is one of the key concerns on Airtasker’s business model, which I’ll address later.

o   Payment Flow: As described in how Airtasker works, the platform plays a central role in the payment flow, allowing it to capture part of the economics created by the transaction.

o   Network Effects: The diagram below from Airtasker’s IPO prospectus summarises the various network effects of the platform well.

Source: Airtasker IPO prospectus

·         Growth options: Whilst the majority of Airtasker’s GMV is derived in the Australian market, it does have a presence in UK, Singapore, Ireland and NZ. Whilst still early days, the growth in the UK market looks very promising, with Airtasker reporting 93% QoQ and 232% YoY during their FY21 update. Furthermore, the recent acquisition of home services marketplace Zaarly gives Airtasker a ready-made presence in the USA market. Zaarly currently has a home services digital marketplace predominantly in three states (Kansas City, Dallas and Miami), with the Airtasker looking to re-brand and it and convert into the infinitely horizontal marketplace model they run in Australia, whilst looking to slowly expand out of Zaarly’s home states. There are clearly risks to the strategy in the US, given it’s a more competitive landscape than Australia, but given they only paid $2.6mn for Zaarly and can scale marketing spend to customer acquisition, I believe it’s quite a calculated one and ultimately shouldn’t be too costly if it doesn’t pan out (ie, the platform is already built).

Source: Airtasker FY21 Presentation

In early 2021, Airtasker rolled out Airtasker Listings. This way the roles of the tasker and customer are switched, with the tasker promoting a package and describing the services offered for a fixed price. The purpose was to allow customers to discover and purchase an expanded set of services that they may not have been aware existed. Whilst still relatively new offering, growth has exploded with a 24% weekly compounded growth rate in bookings (see below).

Source: Airtasker FY21 Presentation

Example of a listing

Source: Airtasker website

·         Cognitive reference: In a 2020 interview on the Good Investing podcast, investor Dennis Hong explained the concept of cognitive reference, as one of three key areas he focused on when looking at businesses (full transcript linked at end of write-up)  

“So, we didn’t come up with the term cognitive referral. Actually, it’s a term coined by a Harvard business school professor called Rory MacDonald. But it’s an area that we found very intriguing as an area where we found some pretty interesting investments. So, think about it in two ways: Product cognitive referral or a service cognitive referral product. Both are interesting. So, think about, if you go into a pharmacy and you say: “Excuse me, do you have any Kleenex?” Do you mean Kleenex? The brand name that is owned by Kimberly Clark. Or do you mean Kleenex? That is top of your mind and synonymous with the generic category of facial tissue?”

“… I think that its service cognitive friends are even more interesting. Why? For the simple reason:  They are harder to replicate than products, but services are often likely to have controlled distribution – often through a native app or a proprietary app. So, think about this. “I ubered it. I ubered it to the office today.” Or: “I’m going to go Airbnb”. As a cognitive front, it’s an ecosystem of hosts and travelers who are looking for each other to facilitate bookings and unique experiential alternative, often urban accommodations, booking.com and Expedia are good businesses, by the way. They kind of do the same thing, but I got to tell you, no one’s ever said: “Oh my God, Tilman, that Expedia was incredible.” “Or gosh those booking.com. They’re so great.” And most people sort of smile a little bit when you say those things, but it’s kind of true. Because it’s kind of natural to say:” “I’m going to go stay at an Airbnb or I’m going to go Airbnb it.” But no one ever says that about Expedia and Booking. And that has real implications actually on the unit economics.

So, cognitive franchises have two competitive advantages on that LTV over CAC equation. So, long term value, which is just how much cash flow comes in over the lifetime value of that customer over the cost of customer acquisition. So, if you have cognitive difference, you immediately have a huge competitive advantage on CAC (=cost of customer acquisition). Because you have immediate recall. And then on the LTV side, you have very high levels of customer retention because you have this cognitive difference. You almost are synonymous at that category and there’s nothing starker actually, then to just look at the businesses at face value like juxtaposing, Expedia and Booking to Airbnb. So, Expedia and booking – up until last year – were spending 9 billion on Google AdWords just to get people to go to their websites. Airbnb in comparison spends very little on Google. So, we try to look for cognitive referrals of all kinds.”

Whilst not quite at the level of ubiquity of “google it” or “I’ll uber over”, airtasker is increasingly entering the lexicon in Australia, as an understanding that you’re intending to go online and hire an individual to do a job for you.

·         Mission-driven Founder-CEO: Tim Fung remains highly engaged as CEO, after co-founding Airtasker in 2012. He is still young (late 30s) and strikes me as extremely insightful and a mission-driven leader, acknowledging the responsibility his platform providers to thousands of taskers who make their living off it, and is constantly looking at ways to improve the platform. He has a modest base (A$280k) and plenty of skin in the game, owning ~ $45mn worth of ordinary shares.

·         Ability to attract talent: Airtasker have demonstrated a track record of hiring engineers and executives from FANG companies, which is quite impressive for a company with a market cap of less than US$300mn. A few months ago, Airtasker appointed Noelle Kim to the position of Chief Marketing Officer (previously Head of APAC Marketing across all Facebook products).

Why does opportunity exist?:

This was something I initially grappled with, because the general consensus is that the Airtasker is a ‘moaty’ business, however this is the conclusion I’ve reached:

·         The stock is somewhat orphaned. The most recent deceleration in growth (to +37% yoy to FY21) now sees Airtasker trading at 15x Price/Sales, which prima facie appears too expensive for the growth bros, yet it’s not currently profitable, so the value sticklers aren’t interested. Meanwhile, the market cap/free float is probably too small for some of the more sophisticated marketplace investors who can appreciate the business quality to take a meaningful position.  Also speculative retail has been scared off the name, after regulators intervened following a Reddit pump that saw the share price go from $0.65 to $1.96, immediately post IPO, before settling into its current valuation range (plus/minus ~$1). With regards to growth, we note that Airtasker still managed to achieve 37% revenue growth in FY21 despite the clear negative impact of covid (Melbourne, its second largest market being the lockdown capital of the world). Also management is still guiding for +30% in FY22, despite the lockdowns in Sydney and Melbourne persisting into the new financial year, which we believe reflects confidence in the previously discussed growth initiatives.

·         As mentioned earlier in the write-up, one of the constant concerns nagging Airtasker’s business model has been the idea that once connected, customers and taskers are economically incentivized to work off the platform. Naturally, this de-platforming effect will vary based on the vertical, however I think the concerns are overstated for two main reasons. Firstly, from the tasker’s perspective, the ability to build a portfolio of work, garner more reviews for the reputation passport (in order to both get more work and/or charge a higher rate) and graduate to a tier with a lower take rate all incentivize taskers to stay on the platform. From the customer’s perspective, the insurance that Airtasker provides (home and contents), the ability to had a third-party hold the tasker accountable and the leverage of being able to post a rating, ensures the platform adds value. I was actually speaking to a friend of mine, who runs an Airbnb hostel. He’s an Airtasker power user, constantly using the platform to hire cleaners after check-outs. Despite having a rolodex full of various cleaners from previous taskers, he still prefers to use the Airtasker platform for 1) the convenience (there will usually be a level or urgency and he can’t be bothered calling cleaners, who may not be available at that specific time needed) and 2) he finds taskers to be on their best behavior, when he has the leverage of providing a rating.

Valuation

Management forecast revenue of +$35mn (+30% YoY) growth in FY22. If we assume that from this point on Airtasker’s revenue CAGRs at 20-25% for the next four years, and operating margins at scale are between 35-40% (mature scaled digital marketplaces in Australia have 40%+ operating margins, whilst Airtasker has above average gross margins of +90%), Airtasker should achieving operating profit of between $25-34mn in FY26. An exit multiple of 30x (reasonable for a digital market-place with high barriers to entry, which should have a stronger moat five years from now, and still be growing in solid double digit range), would see a valuation of $750mn-$1bn, or 5yr IRR between 15-20%.

If Airtasker achieves greater success overseas, there is probably a lot of upside to my revenue growth and exit multiple assumptions.

Links

·         Makings of a Multi-bagger (Altafox Capital) - https://static1.squarespace.com/static/5aaacb57506fbe4636414126/t/5f85c428b4bac16b20450df0/1602602051503/Conclusion+Deck-+Makings+of+a+MultiBagger+-+FINAL-compressed.pdf

·         All Markets are not created equal – 10 Factors to consider when evaluating digital marketplaces (Bill Gurley)

·         Dennis Hong: Love of businesses, competition in China & dogs in investing (Tilman Versch) - https://www.good-investing.net/2020/07/27/dennis-hong-shawspring-partners/

Catalyst

Revenue/Earnings growth