Description

We can’t decide who EverQuote misleads the most – consumers, insurance agent customers, or investors.

We ultimately think this business has a terminal value of near zero, but in the near-term we set an $18-23 price target or -33% to -48% down which is based on 1.5-2.0x 2020 revenue and 33-45x 2020 EBITDA.

We go through in detail below, but our short thesis is summarized as:

1. This is a bad click bait business (lead generation) with a bad value proposition (ROI for insurance customers). Glassdoor reviews at bottom are telling
2. Revenue growth is overstated - they have decreasing website traffic (down -40% y/y in 3Q19), but are experiencing a one-time step-up from externally sourced traffic (revenue +61% y/y in 3Q19). The stock was up >720% in 2019 on account of what was viewed as an acceleration in revenue
3. The stock is expensive at 3.1x/2.6x 2020/2021 revenue and 68x/52x 2020/2021 EBITDA vs. TREE’s 3.3x/2.6x and 18x/15x, respectively
4. Insiders have been aggressive sellers of stock, with the CEO holding 900k shares vs. 1.7mm pre-IPO (July 2018)
5. Significant litigation risk: 1) duping consumers and potentially improper sharing of data; 2) Glassdoor suggests misleading sales tactics; 3) currently being sued by former shareholders over quote request disclosures; and 4) appears to be numerous questionable third party transactions

For those interested, we are very positive on QNST and are happy to provide additional thoughts and/or a write-up if there is interest. We think it’s better positioned in the industry with an attractive valuation and compelling risk/reward (3:1-6:1 upside vs. downside). We like it an absolute basis, but also to the extent you need a pair for EVER.

Business Description:

What is EverQuote? Let’s start by telling you what the Company claims it is, the “largest online marketplace for insurance shopping in the U.S.” And, according to its website “the fast, free, and easy way to compare car insurance quotes!”

Sounds great, right?

They make it sound like they’re a website that will offer rate comparisons for auto insurance, but they are actually a lead generation business. What that means is that they drive consumers to their website, get them to enter personal information, and shop that data to insurance carriers/agents who will then contact you to provide an insurance quote.

So here’s what the business actually does in a step-by-step guide:

1. They pay to drive traffic (consumers) to their website. This can be through Google ads, ads for comparing auto insurance on Yahoo.com, etc. More on their traffic sources later
2. A customer lands on Everquote.com and proceeds through a few pages with information (Zipcode, do you already have insurance, vehicle information, name, gender, birthdate, education level, credit rating, address, email, phone number, etc.)
3. You then choose if you’d like to just receive online quotes, or if you’d like insurance agents to email/call you. By opting in for emails/calls, there’s a bar that indicates you’ll get higher savings. Note that you technically give consent on the prior page to be contacted, and sometimes I did not see this page at all - instead skipping from step 2 to step 4
4. You then land on a page that shows a few insurance carriers with a link that says “View My Quote” without any dollar amount listed. These links basically just take you to the front page of Progressive, State Farm, Allstate, etc. and maybe transfers a couple fields of data (rarely more than name and city/zipcode and in some cases nothing). You have to refill out all the information again to get a quote

Throughout this process, EverQuote gets paid when you click on those “View My Quote” links (a “click”), and they also sell your information to insurance agents in the offline channel (a “lead”). So your local Allstate agent might pay for leads and then bombard you with calls and emails.

Not exactly an “easy way to compare car insurance quotes”. As a consumer, you will undoubtedly hate the experience.

So Who Are Their Consumers, And How Do They End Up On EverQuote.com?

In short, old people that are duped into clicking on misleading advertisements (clickbait).

You’ll see that over half of their traffic is coming from display ads. This source of traffic, which is basically the majority of its business, is very simple. You will see some variation of the below (red box added) fake news article on Yahoo.com, Weather.com, MSN.com, etc.

If you click on this, you’re taken to the below fake news article (an “advertorial”) about how “2 math grads” are disrupting the auto insurance industry or something along those lines. You’ll see a picture of 2-3 young people who may or may not be EverQuote employees, but are definitely not the founders (interesting story about misleading consumers on that here - https://yhoo.it/34pSnYZ).

Once you click on pretty much anything on this page, you go to EverQuote.com.

OK Fine, They’re Misleading Consumers – But Isn’t It Still A Good Business?

So here’s the bull case on lead generation companies:

1. Consumers increasingly want to shop online for car insurance and thus they can drive more traffic to their website
2. Lead gen companies develop a strong brand over time, which drives awareness and organic traffic. You can use this brand to cross-sell other services like mortgages, home services, credit cards, etc.
3. They pay out less for driving traffic to their website than they take in money by selling quotes
4. They provide a good ROI to the insurance agent

Many of these apply to LendingTree.com (TREE), but let’s examine why they don’t apply to EVER.

Point #1 - Consumers increasingly want to shop online for car insurance and thus they can drive more traffic to their website

This point is absolutely true. Consumers want to shop and compare things online. People are going to increasingly search online for “compare car insurance”. Unfortunately for EverQuote, typing that into Google will reveal that larger players like Geico, Progressive, Quoteble, Quotewizard (owned by TREE), Nerdwallet, Esurance, The Zebra, Insurance.com, Compare.com, Insurify, Allstate, Quotelab, top10bestcarinsurance.com all come before any EverQuote property. We believe that scale matters to drive traffic to your website, and EverQuote just can’t compete in traditional channels.

EverQuote is more a bet on whether people will increasingly succumb to click bait, which we don’t think is necessarily a secular grower. There is also potential disruption from ad blocking technology, which would immediately result in material declines to EverQuote’s traffic.

We are also firmly of the belief that eventually you will be able to easily compare and price auto insurance online, thus making EverQuote irrelevant. Despite claiming to be the opposite, EverQuote is a bet on the offline insurance agencies (Allstate, State Farm). We think these are secularly declining segments.

Point #2 - Lead gen companies develop a strong brand over time, which drives awareness and organic traffic. You can use this brand to cross-sell other services like mortgages, home services, credit cards, etc.

Only if you provide a good customer experience, which EverQuote does not. People like LendingTree.com, and return to its site vs. EverQuote’s churn and burn model. >60% of TREE’s revenue comes from repeat users. To be fair, we don’t have this data on EverQuote but suspect it’s much lower.

Point #3 - They pay out less for driving traffic to their website than they take in money by selling quotes

While EVER today is generating a ~30% variable marketing margin (revenue less cost to acquire consumers), we think this declines over time due to: 1) increase advertising costs as competition for traffic escalates; and 2) prices they charge insurance agent customers decline as volumes increase (they have discussed a trade-off between volume and price), plus their customers will realize the bad ROI over the next few years.

Point #4 - They provide a good ROI to the insurance agent

The rough math is: an insurance agent pays $8 per lead, a “good” conversion rate is 3%, and they make $90 for every new policy. So you buy 100 leads for $600-800 and you issue 3 policies at $90/policy for $270 - effectively you need the policy to renew two more times (for a third year) to be profitable. The Company will tell you it’s more like a HSD conversion rate and $165/policy, therefore you are positive on year one conversions. Our own checks contradict the Company.

As you can imagine, these customers also tend to be the most transient and less sticky, so there is generally higher than “normal” customer attrition, making the lifetime value and ROI lower.

OK Fine, It’s Not A Good Business – But Isn’t It Still A Good Investment?

With the stock trading at 3.1x 2020 revenue vs. 3.3x at TREE, we don’t think so. TREE has a significantly better and sustainable business, with some level of valuation support trading 18x 2020 EBITDA (we don’t own it, but it doesn’t make us want to throw up). EVER just reached its first quarter of positive EBITDA, and is trading at 68x 2020 EBITDA.

EVER was up >720% in 2019 because their revenue growth started to accelerate, which we believe is due to misleading factors. The Company discloses “quote requests,” which is basically a completed set of data by a consumer. From 1Q19-3Q19, EVER’s quote requests are +49% y/y, whereas their total traffic is down -18% – in 3Q19, quote requests were +81% y/y while traffic was -40% y/y. (source: third party web traffic provider)

The Company cannot explain this delta when presented with it, but we think it’s driven by what they call a “Verified Partner Network” which was launched in 1Q19. This is just the buying of leads from third parties, and selling it to their existing customer base. While this will boost volumes with a one-time reset higher, we think customers will start to see the lower quality leads and demand lower prices. Importantly, their customers don’t realize they are getting leads not generated through EverQuote.com – management acknowledges this. We would also point out that the Company redefined “quote requests” in their most recent 10-K to include quote requests received from third parties.

The Company also admitted at the RayJay conference (12/9/19) that its EverDrive app wasn’t experiencing much adoption and is being put on pause. This app initiative was something the Company touted during the IPO process.

It’s also not surprising that their revenue per quote and variable marketing margin per quote are trending down -5% and -3% YTD.

We’d also point out that there is litigation in New York Supreme Court against EverQuote by former shareholders that “generally challenge as false or misleading certain of the Company’s disclosures about its quote request volume” (EVER 10-Q). We think there are numerous other litigation angles (misleading consumers/customers, potentially improper sharing of consumer data, questionable third party transactions).

So in summary, we like shorting this click bait Company at 3x revenue and 68x EBITDA.

Other Interesting Things to Check Out:

“Featured Agents”

Two of the four “Featured Agents” listed on EverQuote’s agent website are out of business (red highlight).

Glassdoor

Their overall rating isn’t bad (4.1 avg. rating, 76% recommend to a friend), but those are highly misleading as the Company paid employees to write positive reviews. Here’s a few admittedly selective tidbits:

“The company wants to be a market place for insurance to help consumers, but the day to day work seems disconnected from that vision, instead we’re a lead generator”

“If you believe this company is disrupting a 900 trillion industry, you are right, EQ is scamming thousands of insurance agents and millions of insurance buyers. And those online ads…”

“Embarrassing consumer experience”

“Reps are trained to pitch ‘we spend 10 million marketing $’s every month on google” to benefit the Insurance Agent but the marketing spend is never there and the product isn’t very good for the agent.”

“Sales team is unethical”

“Leads are garbage”

“They trick the 65+ demo into giving them all their information”

“Just a shady, shady, shady place”

“The company business is a little shady, basically being a lead generator for insurance companies. Unfortunately it isn’t marketed like that and online reviews are destroying us”

“Successful end-users are very few. Management looks the other way to shady sales tactics/dishonesty”

“Everquote doesn’t really have a product that helps the auto insurance agent nor the consumer. The consumers are miss lead into thinking something else. It’s all a big lie. Horrible business practice”

“It’s an extremely difficult sale. The product is not as great as they want you to think and lead generation is already a slippery slope. Very very very very low retention rate”

“Product isn’t actually what trainers and managers will tell you... highly shady sales tactics internally”

“The business is insurance lead generation. It’s often sketchy and a terrible consumer experience. Many don’t realize just how many emails and phone calls they’ll receive”

“First and foremost, EverQuote is a bit shady. They are essentially a lead-gen site, which itself isn’t necessarily a bad thing, but people go to EverQuote under the presumption that they’ll get quotes, when that’s not the case. Their information is then sold to insurance providers and insurance agents, who immediately flood them with calls and emails. EverQuote does not provide a real service to customers”

“Advice to Management: Focus on making a product that actually benefits the customer in some way, instead of preying on naive, old internet users”

“Pretty sure this is against the terms of service of Glassdoor but HR PAID people to write the first 20 or so reviews (not sure if they are still doing it). Literally got an email one day that was like ‘We need people to write us reviews on Glassdoor. If you fill out a review and then SHOW US which review you wrote, we will give you $15.’”

“Machine Learning”

The Company repeatedly uses the terms “machine learning” and will continuously reference their MIT heritage. By machine learning, they simply mean using common algorithms to figure out A/B testing (which is more effectively - saying “two MIT grads” or “two Boston grads”). It’s just another data point of how management is misleading investors about their business.

EverDrive app quote (RayJay conference 12/9/19)

Aaron Kessler

“Got it. And then maybe so the side note of the EverDrive app is that something we talked about at the time of the IPO as well kind of how has the adoption been for EverDrive and maybe the monetization opportunity for sale side type of apps?”

Seth Birnbaum, Chief Executive Officer and Co-Founder

“Yeah. We're -- again the app works really well for consumers it does what it's supposed to do, which is to help you measure you're driving. So what we seen in the market is that, it's very early on in terms of mass adoption by consumers and even more so for monetization from  providers. So we're essentially pausing that effort and we'll revisit it in future quarters or years to see how the market is maturing particularly on the monetization and mass adoption sides of it.”

Hours spent Googling “Everquote reviews” - some of our favorites below, including negative reviews from insurance agent customers

EverQuote’s CEO at one point had a positive Google review and used his own name

EverQuote’s Business Development Manager has not one, but two reviews on Google maps. There are 33 reviews at 1.7 avg. - there are 27 1-star reviews and 5 5-star reviews

Four negative review from insurance agents from pissedconsumer.com

Consumer review from sitejabber indicating that they were contacted without consent

Better Business Bureau complaint from agent who thinks they’re buying 3rd party leads from an off-shore lead generator

Catalyst

Quarterly earnings

Analyst downgrades (8 Buys, 0 Holds/Sells)

Deterioration in revenue and VMM per quote request

Decelerating quote request growth as they lap VPN

Continued insider sales

Increased disclosures once they lose JOBS Act “emerging growth company” status