If you’ve bought a home or refinanced in the past few years, you may have interacted with Blend Labs (NYSE:BLND) and not even realized it! The newly public company is focused on bringing consumer financial products like mortgages and auto loans into the 21st century with digital-first options. Easy uploads, fast pre-approvals — it all sounds great. In this episode of Industry Focus: Tech, we talk through Blend Labs and see how it stacks up.
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This video was recorded on July 23, 2021.
Dylan Lewis: It’s Friday, July 23rd, and we’re checking out Blend Labs. I’m your host Dylan Lewis and I’m joined by fool.com’s chief curator of cautious continuous compounding, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: Dylan, I thought this week we were going to do some other show other than an IPO show, but just yesterday, I got a message from one of my followers about an interesting company and I said, “All right, Dylan, we’re going to do another one.”
Lewis: You know, we can’t stay away. We just keep coming back to them, Brian, because they keep showing up. That’s just how it works.
Feroldi: It won’t always be this good, we won’t always be spoiled with new SaaS companies that are coming public that have numbers that make us interested. Spoiler alert, but this is one that I think definitely checks that box for us.
Lewis: It certainly does. We’re going to be talking about Blend Labs. I think you could say that the last year and a half or so has been marked by a lot of companies coming public. That has been like a zeitgeist, Brian. This company in particular, squarely where consumer spending and consumer attention is right now. They are focused in consumer credit and they really got their start in the home loan origination process, so a business that is really front and center with where attention is right now in the financial markets.
Feroldi: If you’re like me and had never heard of Blend Labs before, we’ll get into the reasons why, but I want to read the message that one of my followers, Julian Gregorian — he’s @stealth_bandit — sent to me, he sent this message to me, “You and Dylan might want to check out this company called Blend Labs, ticker B-L-N-D. New SaaS IPO, growth of 100% with a DoBNR, dollar-based net revenue retention rate, over 150%.” So I said, “Okay.”
Lewis: You have our attention.
Feroldi: “You have our attention.” This company is actually public, so this isn’t just an S-1, we do have some data for the company. It did price at $18 per share, raising $335 million after subtracting fees. The stock did pop on the day of the IPO, up to $21, that’s way smaller than we’ve seen for a lot of other stocks, Dylan, especially with this kind of pedigree. The bankers actually did a good job here pricing this. Let’s give them some recognition for finally getting one. As the type of the taping of the show, the stock is about $16-17, something like that, and the market cap is about $3.7 billion.
Lewis: Yeah. Price, basically, where they’re trading now, where the market perception of this company should be. Kudos to the bankers and kudos to the company, by the way, for raising capital at a reasonable valuation that maximizes their ability to get capital. Sometimes, companies leave money on the table, not really the case here so far. This is a business, Brian, that I think consumers interact with without realizing that they are interacting with it. But at core, what they’re trying to do is bring transparency to finance, bring simplicity to finance, and really take what is a stodgy industry and bring it into the 21st century.
Feroldi: If anybody has tried to get a mortgage forever, I guess, you could say, even in 2020 and 2021, the process is still painful. Dylan, I know you have some recent experience with this.
Lewis: That’s right. Yeah. I wound up taking out a mortgage in 2020. I think that there are players in the mortgage industry that have modernized, and I happened to use one of those players. I used Rocket [Companies] (NYSE:BLND)Mortgage by Quicken Loans. But as any shopper should, I wound up going and getting quotes and working with a couple different banks just to see what might be there for me, including a bank that I have a very good personal banking relationship with of checking, savings, brokerage with them. I think it is easy to forget, Rocket Mortgage has been around now for, I think, four or five years, Brian, how revolutionary that product was, and how far ahead of the competition it still is despite being out for multiple years, because the process of doing everything online, being able to digitally upload everything, having it be a tech-first platform, so much simpler than what I got from the legacy provider that I was also working with.
Feroldi: I can’t imagine how difficult that was. I mean, referring this to my mortgage, just over four years ago at this point, and I vividly remember how painful that process was. I went with an Internet bank that gave me the best deal, but I still had to print and physically mail documents. I had to physically sign my name about 60 or 70 times. So it just shows you, if you’re not going with a company like Rocket Mortgage, how behind the times are so many other financial institutions that deal with mortgages.
Lewis: Yeah. I want to underscore something here. We’re on the consumer side of this, and so we’re experiencing an experience that has less friction to it. It makes more sense. It works the way that a lot of other tech-first applications that we interact with every day work, and that’s what we’ve come to expect for a lot of those things. But working that way, reducing friction, reducing the amount of man hours and women hours that need to be in the mix in creating all the documentation for the mortgage process, that’s good for those companies too. What I found going through that was, not only was Rocket’s process easier for me, they were able to meet me with something that the other banks simply couldn’t match. The reason for that, Brian, is they do it on volume, and because they are so high volume, they’re way more competitive on costs and they’re able to scale everything over their costs and wind up with far better economics. So these tech-first platforms wind up being hugely beneficial both to consumers but also to the banks that are offering them.
Feroldi: That’s the core of what this company does. Blend Labs essentially helps other financial institutions compete with Rocket Mortgage. They have a SaaS platform that is adopted by big banks and lots of other financial institutions. We’ll get to some of their customers, but this includes the likes of Wells Fargo, U.S. Bancorp (NYSE:USB), so huge banks. This company created this product that really simplifies so much of the process and digitizes it. You can use Blend’s platform for verification purposes, it can help to automatically or systematize the identity verification, asset verification, income and employment verification, and credit verification. It also can help to speed up the decision making process by automating pre-approvals, and it can help to really optimize the workflow for both the bank as well as the consumer. A thing I love about this is this company developed this product in 2015 and launched it, and they had a heck of a hard time convincing these big players to adopt it. They were so used to the old way of doing it and they didn’t want to mess with any technology. However, they specifically call out the Super Bowl in 2016, which is when Rocket Mortgage debuted, and they said that Super Bowl ad really changed the selling process and all of a sudden, companies were calling Blend Labs to say, “We need to compete and we need your help.”
Lewis: Yeah. I think in a normal real estate market, Brian, you want to be able to move reasonably quickly. There is a timing element to these things where If you’re able to get everything together and move the process along faster, that’s going to work to your advantage as a buyer. That’s particularly true in a red-hot real estate market like we are in right now. I think the advantages that a lot of these companies that have either homegrown their own tech solutions or are working with white-label tech solutions like Blend, they’ve just seen basically huge adoption, because they are able to work so much faster and that’s such an edge when houses are going so quickly.
Feroldi: One of the things that this company calls out is that it has many different case studies. But across their customer base, they say that by using their technology, the average mortgage loan cycle is reduced by more than seven days and that cuts more than $520 in total cost savings. When you compare that to the cost of adopting this technology, they believe that that’s a return of over 6.5x on the cost. Given that, I understand why this company’s having success at landing big clients such as Wells Fargo.
Lewis: Yeah, it’s huge. I think for a financial institution, the case of me having a lot of assets with the bank and then going somewhere else with my home loan is like a nightmare scenario for that bank. If you have a great relationship with the customer and you’re able to offer them rewards, perks, things like that, and then for them to take their business elsewhere despite that is what you want to avoid. Thinking about all the different ways that customers interact with financial institutions. We focused a lot here on mortgages, Brian. But so much of what they are trying to do expands beyond mortgages and really looks at consumer credit and consumer financial products in general.
Feroldi: That’s where I find it exciting about this company. While it got its start just in mortgages and that’s still a major area for the business, it focused on that because that was the most challenging part of consumer banking. When you think about getting a loan of any type, a mortgage is just the most painful and the most complex. If they can develop the technology that simplifies that process, then they can take that same technology and apply it to other types of loans. The company launched this technology for home equity loans in 2018, for vehicle loans and deposit accounts in 2019, credit cards and personal loans in 2020, and it already has set its heights on other areas that it can take this technology to, which does great things for the business economics.
Lewis: I didn’t even think about this while we were preparing the show, Brian, but that reminds me an awful lot of the way that Amazon approached the online opportunity early on. I think one of the main reasons, and a lot of people don’t know this, but one of the main reasons that Amazon focused on the book space in particular, is that depth is all over the place in books. There are so many categories, so many authors. Just look at the Dewey Decimal System, it’s outrageous. They knew that there was a massive advantage in figuring out that problem and then being able to offer a massive library to consumers. Businesses that approach big, hairy problems that way and figure it out with one of the most complicated use cases, wind up with a pretty easy path forward for some of the lighter lifts.
Feroldi: I love that. When you take a technology that worked for one thing and then you can later apply it to different things down the road, that opens up opportunities. One thing this company does call out is as more of its banking partners use this technology that attracts more technology and data and data partners to come to it. So this company now has over 45 direct technology integrations, and that includes with customer relationship management platforms, loan origination platforms, banking products, pricing engines, product engines, as well as there’s actually more than 1,200 realtors, 24 insurance agents, 900 settlement agents, and 29 data providers that are all providing information back to Blend Labs. They believe that those numbers are going to continue to grow, and if so, that can create a virtuous cycle that really builds this company’s competitive advantage.
Lewis: Yeah. This seems like a classic flywheel effect where you start getting data, customers, and providers in the mix, the offering that you’re able to put out there for all of those stakeholders is only improved by more people being in the mix on that. Your analytics only get better by having more people in the mix. You continue to collect more data by having more people in the mix and that allows you to make better decisions, Brian.
Feroldi: Now, no surprise given what this company does. 2020 wasn’t a banner year for business. Not only do they have record numbers of people join their partner ecosystem, but they also saw an explosion in customers as well as loans. If you look at where the company stands today, they are now processing more than five billion in loans per day. Not bad, considering this product is essentially five years old, and it’s already used by 31 of the top 100 U.S. financial firms, 24 of the top 100 non-mortgage bank lenders, and overall, they have 291 customers, including the likes of Opendoor, that’s the SPAC that just came public that buys and sells houses. That’s an impressive client roster given how early this company is.
Lewis: It is. The legacy players are there too, Wells Fargo, U.S. Bancorp, M&T Bank (NYSE:MTB). This is a business that probably has a very hard time and a very long sales cycle with onboarding folks, but you can see that the big institutions are buying into this. Brian, as we talked about before, a big part of it is that they’re catching up. The industry has moved here and this is the solution that gets them there without having to home grow it themselves.
Feroldi: Nothing will make you adopt a technology like this, like seeing somebody else each year launch. This company should be going out and getting a big hug to Rocket Mortgage saying, “Thank you, thank you. You are creating demand for our products.” One other thing that I thought was interesting about this business is it itself, in addition to just coming public, just closed on an acquisition that’s pretty exciting. The company just bought a title insurance company called Title365, which I’d never heard of before, but is a big player in the title insurance industry. In 2020, Title365 did over $200 million in revenue and includes six of the top 12 mortgage lenders by volume that are plugged into its platform. That gives this company not only a new tool to Southwest Airlines customers, but lots of revenue and increased penetration into a bigger customer base. That’s exciting.
Lewis: It’s exciting. It’s an interesting acquisition, Brian, because we’ll get into the financials in a little bit, but they did about $100 billion in trailing sales over the last 12 months. That’s a sizable acquisition when you think about the composition of that business, it is not a small one. Very often, you see some of these mid-sized, mid-cap companies have gone out there and grabbing small players and plugging them in, but it’s a sizable bet for them.
Feroldi: Yeah. But we don’t really have too much data on that, so the numbers already focusing are just the core business, so keep that in mind. But again, let’s get right to the headline number for this company that I think was both a big wow moment for us. In 2020, obviously, a banner year for this company. This company’s dollar-based net revenue retention rate, the good one, retention including churn, was 162%. That is Twilio, Snowflake, Zoom levels, that is an outstanding figure.
Lewis: Yeah. I mean, that’s the number you get tattooed on yourself. It’s outrageous to see it. You almost think it’s a typo and that they transposed the two and the six. It is that staggering and that’s rare company, Brian, you mentioned some names in there. Those have been some of the most anticipated IPOs when they did come public. This has been a little bit of a sleeper which is surprising given how strong some of the core metrics for this business are.
Feroldi: Again, while that number was very, very high in 2020, it’s not like that was a completely out of the blue number. If you look back over the last five quarters, that’s what we have data on. The 162 was for December 31st of 2020. In the most recent quarter, March 31st, that number accelerated to 179%. The reason it’s doing so is because more banks are choosing to use this product to fund more of their loans. If you look at total banking transactions, on March 31st of 2020, so just over a year ago, 191,000 total transactions took place on the platform. Fast-forward to the first quarter of this year, that number grew to 494,000. That is more than a doubling of total transactions in a relatively short period of time. Given that, I understand why this company has garnered a pretty generous valuation.
Lewis: Yeah, it totally makes sense to me. I look at this and it’s like a company that’s solving a big and difficult problem, making it very easy for some of these legacy players to catch up. I like that we mentioned Twilio earlier because I think there are some comparisons here, Brian, both in the opportunity and in the risk. For the folks that are maybe uninitiated with Twilio, basically, communications for apps that don’t want to build out those communications themselves, and functionality for apps that don’t want to do those themselves. It may seem niche, but it’s massive. They solve a problem that a lot of people just don’t want to have to home-grow themselves. The risk with that is that they go out there and home-grow themselves at some point and we saw that that hit Twilio at one point with Uber, one of their major customers. The risk is always going to be there for something like this, but when you solve a problem and you do it so well, that becomes a very sticky relationship.
Feroldi: Yeah, I think that’s a great analogy here. Although one thing I will say is that Twilio is primarily a usage-based model where the more you use it, the more you pay. There are some elements to this. In fact, that was a little bit confusing to me at first when I was reading this I was like, a dollar-based net revenue attrition rate that high, this must be a consumption-based model. There is a consumption component to it but the majority of this company’s revenue is actually subscription-based. That big of a dollar-based net revenue attention shows that more of the employees are using it and they’re using it more across the organization. Only about 12% of this company’s total revenue was usage based in both 2019 and 2020. It’s possible that it could grow over time and that could be a larger and larger lion share of the business but don’t think like we did initially that this is a usage-based company. It’s a subscription mostly.
Lewis: That’s a great point, Brian, because sometimes, when you make those comparisons, one stock to the other to try to help explain something, you can easily assume all of those business model elements carryover. One thing that I was a little surprised with looking at the S-1 here is, customers weren’t as concentrated as I thought they would be. We saw 18 customers generating more than $1 million in revenue. That was about 53% of revenue in 2020. But even the biggest customer for this company didn’t make up as much of the pie as I thought they would.
Feroldi: 13% of revenue was their number one customer in 2020, I’m going to guess that that’s Wells Fargo. That’s probably correct, although it might not be. If you look back in 2019, they had two customers that were more than 10% of revenue. They have over 290 customers in total now and it is good to see that kind of a diversification. So yes, like you, I was pleasantly surprised to see, there is some revenue concentration risk but it’s not nearly as high as I was expecting it to be.
Lewis: Yeah, I wouldn’t have been surprised just on the early pitch for this business if one customer was like 40% of revenue, just with the big names that they work with and how much loan volume they handle. Obviously, that mitigates some of the risks that you’d expect with one of these businesses. Let’s look specifically at the books now that we’ve gotten a good overview of the business, Brian. A good time to come public for a company like this, we talked about how 2020 was a banner year, nearly triple digit year-over-year growth for this company. Not surprising in a low interest rate environment where there are a lot of refies and a lot of new mortgages being written.
Feroldi: Last year, their total revenue grew 98% to $96 million. The next thing that I always look at is gross margin and the gross margin here is good, not outstanding, given what we’ve seen by some other SaaS companies, but good, it was 64% blended. So that gives this company about $62 million, roughly, in gross profit. Now, that’s the top line and that looks pretty good to see that kind of growth. However, this company is spending big right now to drive that growth. Research and development, sales and marketing, and general administrative costs last year were $137 million. That was more than double the company’s gross profit. As a result, we saw a net loss of $74 million. That’s a sizable number when compared to the company’s top line revenue of $96 million, so that is a downside to this company. It’s relatively early in its commercialization, so the net losses are huge. One can hope that they’ll fall over time, but make no mistake, this company is losing a lot of money and will do so for a while.
Lewis: Yeah, and that’s just the phase they’re in with the growth and adoption. If you are painting a picture of this business in this industry, basically, there’s Rocket Mortgage, there’s everybody else. If you can help everybody else match Rocket Mortgage at some point, you want to be the player there. If you’re in a position to become that de facto option for people who don’t want to home-grow it, you want to be as widely adopted as possible and this is your opportunity to acquire customers because the use case is just so darn compelling right now and the market is so hot, so I don’t expect them to slow down any of that marketing spend with what we see with gross margins. If they do at some point and they slow down some of that R&D as well, there’s going to be cash leftover. There’s plenty left over at +60%. There has been a little bit of expansion of that over time. But I imagine Brian, with the mix of revenue and probably some professional services stuff that they have in there, there’s probably some things that weigh on that a little bit.
Feroldi: That is one thing that irked me about this document is they just told us revenue. They said there’s usage based revenue, there’s subscription-based revenue, there’s consulting A.K.A. service revenue, which we’ve seen in a lot of other SaaS companies, carries pretty negative gross margins, so that can drag it down. We didn’t get any of that breakout with this document. All they said is, “Hey, here’s our revenue, here’s our cost of revenue, and our consolidated gross margin was 66%.” I’m guessing that overtime with scale, that number can continue to grow, maybe it can get into the 70s, maybe even the high 70s. But for right now, it’s 66%. An OK number, we’ve seen better though.
Lewis: While we’re airing some grievances, Brian, I’ll throw in there that, over the course of the show we’ve said Rocket Mortgage more times than they did in their S-1. We’re learning this space and we’re trying to get up to speed. I do think it’s a little bit odd that a company like that was not name checked at some point during the S-1 and that we didn’t get specifically identified any main competitors, it’s possible they’re in there, I did a Control F, I was looking for it, and I couldn’t find it.
Feroldi: Like you, I searched for competitors in this company, was tight-lipped about it, other than to say, we compete with a lot of companies, we’re not going to tell you who they are, just know that they’re out there. Some quick searching showed me that some of their main competitors could be a company called Black Knight which I’ve never heard of, but it’s a major player in this industry. Ice Mortgage Technology, if that name sounds familiar, that’s because it used to be called Ellie Mae which is a company that I was actually an investor in when they were public before they got bought out. Another one to keep your eye on is called nCino, N-C-N-O, which is a company that came public that does a lot of back-office or office work for banks and could be a direct competitor with them to say nothing of Rocket Mortgage itself. But yes, like you, I was a little irked that we didn’t get more details about, “Here are our main competitors.”
Lewis: One thing to love though, Brian, is we do have a founder-led business. Nima, the CEO is the founder, still at the helm, still heavily invested in the business and there’s a nice founder story here in that this is someone who I think identified a problem, thought, “Okay, I’ll go out there and fix it,” found that there was a lot of friction to getting adoption with that service, but had the breakthrough moment in part because Rocket Mortgage forced the hand of the industry and was then there to provide to everyone else who wasn’t there yet.
Feroldi: I love finding founder-led businesses and I love that that’s what this happens here. Our standard checks came out with pretty good results here. So if you go to a Glassdoor, all there’s only 36 ratings, not a ton, the earlier ratings on Nima are pretty damn good, 4.2 stars out of 5, 86% of them approved him as CEO, and 79% of employees would recommend the company to a friend. He also owns the lion’s share of the total voting power of the company. He has a special class of stock that gets 40 votes of shares, so he owns about 18 million shares of stock. That’s a tiny number, that’s worth a couple of hundred million dollars. His incentive package should even increase that overtime if the company succeeds. But because they’re super voting shares, this is a company that is controlled by him. One other thing that I want to say about the management team is, you have to look at the president of this company too. The president’s name is Tim Mayopoulos. Again, I’m terrible with pronunciation, but what’s exciting about him is he was the CEO at Fannie Mae for more than six years. That is a major feather in this company’s cap to have a former CEO of Fannie Mae. That’s a part of this company’s executive team and he has been there for 2.5 years. One of the things that’s worth noting is PayPal co-founder Max Levchin was one of the early investors in this company. That’s a heck of a good backing from the management team in the early investor perspective.
Lewis: I feel like Max Levchin has been name checked on Industry Focus several times recently. We’ve talked about a couple of different companies that have come public recently that he was either an early investor in or involved in with the management team in one way or another. Good for him. I mean, I’m sure he’s doing pretty well.
Feroldi: He knows fintech, I mean, if that name sounds familiar. The co-founder of PayPal, he’s currently the CEO of Affirm, so he has got an eye for fintech. So it does give me hope that he is an investor in this company.
Lewis: Given the pedigree of the folks in the mix here, I think it’s safe to say, Brian, that there is a sizable opportunity here with this business. We talked about just the sheer amount of money that they help facilitate on a daily basis. It gets big fast when you’re in the mortgage industry. The fact that they are increasingly expanding into other elements of consumer credit and financial products just means that the opportunity is going to get bigger and bigger.
Feroldi: The company does provide a total addressable market opportunity for itself, and it pegs that opportunity at more than $33 billion today. There’s also room for that number to grow over time as it enters new product categories. One of the things that it calls out is the real estate commission industry, which it believes it can get into down the road. But $33 billion today is a massive number, especially when you compare it to the $100 million in trailing revenue, yet again, if this company doesn’t work out, it’s not because the opportunity isn’t enormous.
Lewis: Yeah, it’s more likely than that is probably because other people are heavily investing in this space and possibly beat them to it. We’ve talked about some of the competitors already. Basically, within the industry, there’s Rocket Mortgage and that’s a homegrown product from Quicken Loans. They are the standard bearer for what people expect now, when it comes to tech-first, underwriting, and mortgage approval processes. There are other players that work a little bit more with banks. Like we said before, if you’re using Blend as a product, you are probably not even realizing that you’re using Blend on the consumer side, it’s just that they are using a very white-label provider for the likes of Wells Fargo or US Bank.
Feroldi: It’s like if you’re shopping online and you don’t even know that you are using Shopify, you’re probably using Shopify, but unless the website goes out of the way to say that, you don’t even know you are using it. Same idea here. Very similar to Twilio too. You’ve probably used Twilio dozens of times and had no clue.
Lewis: Yeah. With that, there’s not going to be a lot of consumer brand loyalty, but they’re to necessarily Blend, but there’s going to be severe B2B loyalty with this company. There are other people that are able to hop in and provide better solutions or cheaper solutions that they might be attractive to some of the folks that they currently supply their solutions to. But Brian, I think we talked about a long sales cycle with this type of product, huge upfront investment in both learning how the systems work and implementing them. If the product works the way that customers expect it to, and you tend to see it in that revenue retention rate, they are not going to go anywhere.
Feroldi: I don’t think so. Overall, the key takeaway for me on this company, there’s a lot to like. Digging through this S-1, I was more pleased than I was upset with things. As a quick reminder, SaaS-based business model, extremely strong dollar-based net revenue retention rate. I think that once this product gets into a bank, the switching costs just become huge to try and get this product out. The growth has been extremely strong, there’s already signs of optionality. The total market opportunity is large. It’s a founder-led management team and we didn’t get into this, but the balance sheet is going to be very strong post-IPO. They’re going to have almost $600 million in cash and zero debt. While there are lots of losses, they have plenty of liquidity to fund themselves. Now, offsetting that, this is a competitive landscape and we weren’t given a full look at how competitive it is, there is a little bit of customer concentration at least to get used to. The company is losing a lot of money, will continue to do so, and lending new customers is very expensive. One thing to note is while the company did report 98% revenue growth last year, almost all of that was from expansion of its existing customer base. That shows that it’s really hard to get new customers on this platform. On the flipside, once they are there, it’s really hard to get off. But overall, Dylan, I would love to know, is this a company that interests you?
Lewis: Yeah, it does. I think there’s one other risk that we should probably talk about. It’s somewhat unique to this company for the tech show, because we don’t really get into businesses that are affected directly by interest rates nearly as much as maybe the Monday Financials show. We stole this company from them, Brian, but that’s all right.
Feroldi: Don’t tell them.
Lewis: I mean, this is a business that is going to run through the economic cycles depending on where consumer confidence is, where interest rates are, and how easy it is to borrow money. We’re at a point right now where all cylinders are gone and consumer lending, we’re seeing a pretty hot real estate market, pretty hot car market as well. That all bodes really well for this business. At some point, the parties slow down a little bit. This is going to be one of those companies that is just subject to the whims of macro factors, interest rates, etc. If you’re looking out five, 10, 20 years, I think businesses, especially financial institutions, are going to be making things easier. But I think that is a short to medium term risk for this company.
Feroldi: I think that’s a really good point. The other thing I’ll throw out there is as a former investor in Ellie Mae, we saw that whenever the company reported, mortgages are made in two ways. First off is just new home-buying, No. 1. No. 2 is refinancing. The refinancing can wax and wane depending on interest rates. To your point, the last year, we’ve seen a tremendous amount of people refinance their mortgages to take advantage of the rock-bottom interest rates. If interest rates rise and they will eventually, we don’t know when, but they will eventually, the total demand for mortgages could fall even if the housing market itself remains strong. To your point, that could be something that influenced this company’s short-term results and that’s just the nature of the business.
Lewis: It is. To tie that to something that I think folks should be keeping an eye on, watch the balance sheet and see what their cash position looks like over time, what their debt looks like overtime. If they continue to maintain a pretty healthy cash position, I’m not saying that you have to worry about too much. If they’re in a position where there are some downturns, they’re going to be in good shape. But I think this is a business, maybe more so than some of the other ones that we talked about generally, Brian, where you really want to make sure that they are on solid financial footing because they’re going to have to hit those moments at some point. It’s just a reality of working in this business. That said, I mean, this is a somewhat richly valued stock, Brian, but just under $100 million in trailing 12-months and it was about a $3-something billion valuation.
Feroldi: Yeah, $3.7 billion, so that’s about 37 times sales. The only thing that is confusing is that these financials are just off of the core business and they’re going to change once that acquisition of Title365 goes through or perhaps dramatically. I didn’t see anything about our gross margin profile in there, our costs were going to go up, our losses were going to go up. We don’t know, so that is something to watch. For that reason, if I was interested in this business, I probably wouldn’t buy it until after we get the company’s first-quarter earnings report with this one in particular, because that is going to really change the financials in ways it’s hard to say right now. I would definitely want to see that information with this company in particular before I invest in it.
Lewis: Yeah. If the thesis is more or less the same and we see that the financials are more or less coming together the same way that we’re looking at them now. At 30 something time sales, if there weren’t a rich market and that is a rich valuation in some respects, it’s not that crazy in a lot of other respects, especially because this is on the smaller side of a mid-cap company and there is a ton of opportunity in front of this business. This company just screams optionality to me. I think he’s put it well before, Brian, where you said, it’s not going to be from lack of opportunity if this company doesn’t succeed. There’s a lot to like here, I’m with you. I want to see a little bit more on that acquisition before I pull the trigger but this is definitely a watch-list stock for me and a fun one because it gets me outside of the traditional tech space that I tend to look at.
Feroldi: Awesome. Well, thanks again to Julian Gregorian, @stealth_bandit, for putting it on our radar. This is a fun company to research.
Lewis: Yeah. We have to say it all the time and we need to emphasize that when we specifically do a show based on what our listener recommends. Give us a holler if you want us to talk about a specific stock, [email protected] You can tweet us @MFIndustryFocus. Brian is @BrianFeroldi, I’m @WilyLewis. We love getting suggestions for shows, it makes our job super easy, Brian.
Feroldi: It does. It’s always fun to get new ideas that we hadn’t heard of but yet blow us away.
Lewis: Yes. Huge thank you to our listeners today and future thank you for listeners that are going to be suggesting show ideas. Brian, I think that’s going to do it for this one.
Feroldi: Awesome. Have a nice weekend, Dylan.
Lewis: You too, Brian. Always fun to head into the weekend chatting with you. Fools, always fun to be able to kick off the weekend with you, maybe listening in the car, on your walk home, wherever it may be. If you’re looking for more of our stuff, subscribe on iTunes or wherever you get your podcast, Spotify, podcast.fool.com, we are there. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.