CARE.COM INC CRCM
May 09, 2019 - 12:35am EST by
rizzo
2019 2020
Price: 16.32 EPS 0 0
Shares Out. (in M): 32 P/E 0 0
Market Cap (in $M): 529 P/FCF 0 0
Net Debt (in $M): -15 EBIT 0 0
TEV ($): 514 TEV/EBIT 0 0

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Description

 

Investment Thesis

 

Care.com (CRCM) is attractive due to its recent 30% decline stemming from reputational concerns that have little impact on its underlying business fundamentals. Over the next year I believe Care has 25-40% upside in a base case given its historical valuation ranges, while over the longer term, its position as a top player in an underserved marketplace could merit a premium valuation in line with other leading online marketplace companies.

The Situation

On March 8th, the WSJ published an investigative piece questioning Care.com’s background check process for caregivers, which was then followed up by a March 31st report that uncovered thousands of unverified listings for its day care centers. Over the past month, numerous media outlets jumped on the headline-grabbing opportunity and with securities class action lawsuits filed against the company, shares are off 30% from March 8th and 36% from the 52-week high.

 

There have been nine incidents over the past six years where caregivers with criminal records were listed on Care.com and later accused of committing a crime while caring for children or elderly people. There have also been numerous instances of unverified or unlicensed day care centers listed on the site. Although the incidents involving children are terrible and unimaginable (but nothing new), Care has clearly stated that families who want a more granular, employment-level background check will have to pay extra. Care performs a preliminary screening using multiple criminal databases, and although it is unacceptable harmful people bypassed this stage, I believe the company is in the process of adequately correcting its past mistakes.

 

Care’s March 11th 8-K stated that the company implemented new oversight processes for caregiver accounts and disclosed the removal of 10% of caregiver accounts over several quarters based on preliminary screening results. The 8-K filed on April 1st noted that all unverified day care center listings were removed, representing 45% of total day care centers. On the surface, losing 10% of caregiver profiles and 45% of daycare centers seems like a big deal, but the revenue associated with all daycare centers represents only .5% of total revenue, while caregiver profiles can differ in quality and revenue impact.

 

Investment Highlights

  • Trades at 33% discount based on 2019E FCF yield with conservative revenue growth assumption.

    • P/S: 17% discount based on 2019E revenues.

  • Best-in-class platform with improving unit economics and favorable secular tailwinds.

    • Churn remains flat but ROI, length of paid time (LOPT), and customer acquisition costs (CAC) are improving.

    • Low penetration of current market represents significant growth opportunity, especially in senior care given age demographics.

  • Top company in large, fragmented marketplace with no publicly-traded peers.

    • Diversifying revenue mix through Care@Work’s corporate partnerships.

    • Investments across senior care verticals should add to growth story.

  • Executive Officers and Directors own 28% of the stock.

    • CEO has 112.5K options with exercise price of $21.03.

 

 

LTM Margins Over Time:

Business Overview

Care.com is the world’s largest online marketplace for managed family care, running a network of 18.3 million families and 13.4 million caregivers, spanning more than 20 countries (~10% of revenue). The company helps families address care needs such as childcare, senior care, special needs care, and other non-medical family care needs across four service lines.

 

Business-to-Consumer:

  • Consumer Matching: Provides subscribers (caregivers) with network of care providers (employers).

    • Competitors: UrbanSitter and SitterCity

    • Removed caregiver accounts fall into this service line.

  • Payment Solutions: Payroll processing and tax preparation services for nannies, housekeepers, and other household employees.

 

Business-to-Business:

  • Care@Work: Employer-sponsored program for employees seeking matching solutions, on-demand back-up care services, and consumer payment solutions.

    • Fastest growing service offering and primary driver of shifting revenue mix.

  • Recruiting and Marketing Solutions: Serves small-to-medium sized businesses such as day care centers, nanny agencies, and home care agencies.

    • Removed daycare centers fall into this service line.

 

What the Market is Missing:

One can make many assumptions on what will happen to Care’s user base as well as its growth, but given disclosures from the two most recent 8-Ks, it is apparent that the sell-off was a massive overreaction.

 

Many profiles on the site are non-paying and add little to the bottom line beyond immaterial marketing revenue. Given the recent news and steep slide in share price, and even when using the most conservative assumptions, the market’s reaction was unwarranted. In the above impact analysis I assume that at a minimum, caregiver accounts have a 50% impact on paying families. A closer look at Care.com’s statistics shows that only 1.8% of the 18.3M families/members are paying members (Q4 2018). If one were to assume a similar dormant rate for caregiver accounts, the share price impact would be much lower.

 

Despite recent image problems for Care.com, its website still seems like the clear-cut leader in the space. By searching around on some well-known parenting websites, I can see that Main Street has a more optimistic view compared to the investors who sold off after March 8th. Searches on Parents.com, Babble, Alpha Mom, All For the Boys, Baby Center, Fatherly and Bundoo yielded zero negative articles about Care.com, while Mother.ly had one article about Care.com’s recent background screening issues. Additionally, it appears the post-article hype is beginning to fade.

 

 

 

Google Trends - “Care.com WSJ”

 

In addition to the caregiver and childcare issues, BestBuy suspended its Care@Work partnership and is currently weighing its options. The sell-side has picked up on this development, but the caregivers in the Care@Work segment represent Care.com employees who are internally screened by the company. While other companies could potentially sever ties with Care.com, this seems unlikely given we are almost two months away from when the negative news flow began circulating.

 

Customer Matching Competitors:

The consumer matching space--aligning families with caregivers--is fragmented but has some larger competitors such as Sittercity and UrbanSitter. Despite the negative headlines, Care.com has greater search activity than its competitors. Care.com’s app is ranked #78 under the Lifestyle category on the App Store and carries a 4.6 rating from 34.8K reviews. In comparison, Sittercity has the same rating as Care.com but half the reviews, while UrbanSitter carries a 4.8 rating with only 5.4K reviews.

 

It is also worth noting that its competitors have dealt with similar issues in the past:

 

Google Trends

 

Business-Level Value Drivers:

Average revenue per user (ARPU) has been flat but improvement in LOPT and CAC is boosting ROI despite stagnant churn. While paying families as a % of total families has been in steady decline, opportunity through penetration of current addressable market remains.

 

Valuation

Based on a blend of FCF yield and Care’s historical EV/Sales multiple ranges, showing upside of 25-40% over the next year.

 

Assumptions

  • 2019E: Revenue projection of $206M, conservative given management’s guidance of $217-$221.

    • Management’s past revenue guidance has proven to be a solid proxy.

  • Free Cash Flow Yield: trailing four-quarter average

 

Key Risks

 

  • Integration challenges in senior care investments

  • Additional bad press

  • Termination of Care@Work partnerships

  • Churn

  • Ongoing securities class action lawsuits

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 

  • Q1 and Q2 earnings show minimal financial impact from recent news.

  • Announcement of new Care@Work partnerships.

    • Or alternatively, concerns fade regarding potential partnership terminations (e.g. BestBuy).

  • Buybacks through strong cash position.

  • Continued investment in senior care growth adds free cash flow and/or portends increased attention.

    sort by    

    Description

     

    Investment Thesis

     

    Care.com (CRCM) is attractive due to its recent 30% decline stemming from reputational concerns that have little impact on its underlying business fundamentals. Over the next year I believe Care has 25-40% upside in a base case given its historical valuation ranges, while over the longer term, its position as a top player in an underserved marketplace could merit a premium valuation in line with other leading online marketplace companies.

    The Situation

    On March 8th, the WSJ published an investigative piece questioning Care.com’s background check process for caregivers, which was then followed up by a March 31st report that uncovered thousands of unverified listings for its day care centers. Over the past month, numerous media outlets jumped on the headline-grabbing opportunity and with securities class action lawsuits filed against the company, shares are off 30% from March 8th and 36% from the 52-week high.

     

    There have been nine incidents over the past six years where caregivers with criminal records were listed on Care.com and later accused of committing a crime while caring for children or elderly people. There have also been numerous instances of unverified or unlicensed day care centers listed on the site. Although the incidents involving children are terrible and unimaginable (but nothing new), Care has clearly stated that families who want a more granular, employment-level background check will have to pay extra. Care performs a preliminary screening using multiple criminal databases, and although it is unacceptable harmful people bypassed this stage, I believe the company is in the process of adequately correcting its past mistakes.

     

    Care’s March 11th 8-K stated that the company implemented new oversight processes for caregiver accounts and disclosed the removal of 10% of caregiver accounts over several quarters based on preliminary screening results. The 8-K filed on April 1st noted that all unverified day care center listings were removed, representing 45% of total day care centers. On the surface, losing 10% of caregiver profiles and 45% of daycare centers seems like a big deal, but the revenue associated with all daycare centers represents only .5% of total revenue, while caregiver profiles can differ in quality and revenue impact.

     

    Investment Highlights

     

     

    LTM Margins Over Time:

    Business Overview

    Care.com is the world’s largest online marketplace for managed family care, running a network of 18.3 million families and 13.4 million caregivers, spanning more than 20 countries (~10% of revenue). The company helps families address care needs such as childcare, senior care, special needs care, and other non-medical family care needs across four service lines.

     

    Business-to-Consumer:

     

    Business-to-Business:

     

    What the Market is Missing:

    One can make many assumptions on what will happen to Care’s user base as well as its growth, but given disclosures from the two most recent 8-Ks, it is apparent that the sell-off was a massive overreaction.

     

    Many profiles on the site are non-paying and add little to the bottom line beyond immaterial marketing revenue. Given the recent news and steep slide in share price, and even when using the most conservative assumptions, the market’s reaction was unwarranted. In the above impact analysis I assume that at a minimum, caregiver accounts have a 50% impact on paying families. A closer look at Care.com’s statistics shows that only 1.8% of the 18.3M families/members are paying members (Q4 2018). If one were to assume a similar dormant rate for caregiver accounts, the share price impact would be much lower.

     

    Despite recent image problems for Care.com, its website still seems like the clear-cut leader in the space. By searching around on some well-known parenting websites, I can see that Main Street has a more optimistic view compared to the investors who sold off after March 8th. Searches on Parents.com, Babble, Alpha Mom, All For the Boys, Baby Center, Fatherly and Bundoo yielded zero negative articles about Care.com, while Mother.ly had one article about Care.com’s recent background screening issues. Additionally, it appears the post-article hype is beginning to fade.

     

     

     

    Google Trends - “Care.com WSJ”

     

    In addition to the caregiver and childcare issues, BestBuy suspended its Care@Work partnership and is currently weighing its options. The sell-side has picked up on this development, but the caregivers in the Care@Work segment represent Care.com employees who are internally screened by the company. While other companies could potentially sever ties with Care.com, this seems unlikely given we are almost two months away from when the negative news flow began circulating.

     

    Customer Matching Competitors:

    The consumer matching space--aligning families with caregivers--is fragmented but has some larger competitors such as Sittercity and UrbanSitter. Despite the negative headlines, Care.com has greater search activity than its competitors. Care.com’s app is ranked #78 under the Lifestyle category on the App Store and carries a 4.6 rating from 34.8K reviews. In comparison, Sittercity has the same rating as Care.com but half the reviews, while UrbanSitter carries a 4.8 rating with only 5.4K reviews.

     

    It is also worth noting that its competitors have dealt with similar issues in the past:

     

    Google Trends

     

    Business-Level Value Drivers:

    Average revenue per user (ARPU) has been flat but improvement in LOPT and CAC is boosting ROI despite stagnant churn. While paying families as a % of total families has been in steady decline, opportunity through penetration of current addressable market remains.

     

    Valuation

    Based on a blend of FCF yield and Care’s historical EV/Sales multiple ranges, showing upside of 25-40% over the next year.

     

    Assumptions

     

    Key Risks

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

     

    Messages


    SubjectValuation, Senior Care Oppty
    Entry05/09/2019 01:47 PM
    Memberrobberbaron

    You're modeling a rev miss ($206mm) to mgmt guidance ($217-221mm) but saying guide is usually a good proxy? If you believe they'll miss but they've usually beaten/delivered the guide then why should the stock trade back to historical EV/S level? Maybe I'm just not following the logic.

     

    On the senior oppty, I agree it could be a future source of upside. But have you done any work on what the CAC differential would be vs history in order to get that growth? My view is your LTV or ROI on customers might compress esp given the core paying base is already not growing. Seems like it could result in downside to margins/FCF even if you get a bump in top-line.


    SubjectRe: questions & comments
    Entry07/16/2019 01:42 PM
    Memberxds68

    Just an anecdotal comment regarding subscription life (as a mostly happy user of the service) there's not a lot of incentive to mantain your subscription once you've hired a babysitter or caregiver. I suppose some families might like having the option of additional part-time sitters, and indeed I maintained my subscription for a couple years for that purpose, but I never really used it and basically forgot about it until I read your pitch. After I began cancelling the website offered to reduce my cost from $20/mo to $5/mo, which was kind of tempting, but I still cancelled. I would use it again if our babysitter quit, or if we were in a pinch for short term care, but don't see much incentive to maintain in the interim. Put another way, this may be more of a pay per use business. What is the churn rate?

     

     


    Subjectshares outstanding
    Entry07/18/2019 03:37 PM
    Memberaa123

    the company talks about 40 million shares outstanding fully diluted. I assume this included the shares underlying the preferred but the rest would come from stock comp. This makes a meaningful difference. Do you know how they get to the 40 millions shares? thanks. 


    SubjectRe: shares outstanding
    Entry07/18/2019 04:16 PM
    Memberfinn520

    It's 32.2m basic shares, ~2-3m impact from options/restricted stock (depends on share price assumption), and 5.1m from preferred = ~40m diluted shares.


    SubjectRe: Re: Re: questions & comments
    Entry08/06/2019 02:59 PM
    Memberxds68

    Sorry, missed this before. As a sample of one, no, I don't care about the negative press - I'm not using it for daycare though - we've just used it for home care, and found our full time babysitter through it.

    I would say more recently we've been using word of mouth a little bit more as well as Facebook groups - but I think if we were in a pinch we would go back to the care.com service.


    SubjectQuestion for finn520 re: payments
    Entry08/06/2019 03:53 PM
    Memberhumkae848

    finn520 - thanks for your comment. We are only beginning to look at this but I was wondering what makes you think their payments business is so valuable and who might be interested in it? 


    SubjectRe: Question for finn520 re: payments
    Entry08/06/2019 04:38 PM
    Memberfinn520

    The company originally got into the Payments business with the $54 million acquisition of Breedlove & Associates in 2012, which has since been renamed "Care.com Homepay".  This is basically "ADP for the home", as the company refers to if.  If you have a household employee (a nanny) and pay them on the books, you pay Homepay $1,000-1,500 per year to manage all the paperwork/payments/tax stuff.

    https://www.care.com/homepay/about-homepay

    I have used this product for many years and can't recommend it highly enough.  The paperwork is preposterously complicated and the service is fantastic.  When you call them with questions, you get a knowledgable human within a minute and they usually have the answer to your question.  I believe this business is still managed separately out of Austin, where it was started.

    The $39/month ARPU that the company reported for payments in 2018 is a combination of the Homepay business and a burgeoning businses in managing payments through the site for routine care.  The company realizes the issue with people finding someone on the site and then cancelling, so they are trying to manage all payments through it as a way to increase stickiness.  The Homepay ARPU is closer to $125 per month with avg duration over 30 months, and the matching ARPU in the low $30's.  The company has discussed this over time in their conference calls.  The disclosure isn't great and has gotten worse over time.

    Payments segment revenue has grown from $11 million in 2013 to $27 million TTM.  I don't know the exact breakdown between the two pieces, but I think the Homepay part is a good chunk.  If that was a standalone business, I think the margins would be quite high.  I also don't think it would be terribly difficult to separate it.

     


    SubjectRe: Re: Question for finn520 re: payments
    Entry08/06/2019 04:56 PM
    Memberhumkae848

    Thank you for the thorough and speedy response.


    SubjectRe: this should be sold
    Entry08/06/2019 11:30 PM
    Memberaa123

    finn520 - thanks for the comments. why are you saying the company isn't well run? also is ev to revenue the right metric to use here? thanks so much. 


    SubjectRe: this should be sold
    Entry08/07/2019 09:48 AM
    Memberrizzo

    Finn,

    Couldn't agree more. While I clearly understated the market's perception of the company and how investors would react to additional bad news, I don't see things getting much worse with CEO/CFO both resigning.

    I'm obviously disappointed in this one but have to be patient here as multiple value-unlocking events could occur. Care@Work's growth (~50% YoY) can provide a backstop, while new leadership can correct some errors made in the Matching & Payments segments. As you also mentioned, this seems attractive for an activist investor, and in my opinion, was worth a look prior to the large declines from the CEO/CFO resigning.

    Thanks for the comments.

     


    SubjectGDPR like benefit from background screening
    Entry08/07/2019 11:28 AM
    MemberRay Palmer

    Appologizies if this is a silly question as I'm new to the name, but longer term could additional background screening benefit CRCM in a way similar to how GDPR probably benefitted large tech players? 

    My thought process is setting up a full background check system is expensive and involves lots of fixed costs; if doing so becomes table stakes for running one of these marketplaces, doesn't that push out smaller players and moat them from new entrants?

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