Shares of restaurant software company (NYSE:OLO) fell 12.5% in the morning session after the company reported its third-quarter results, and it was mostly choppy waters. Olo revised downward its guidance for the addition of new locations on its platform, signaling a slower pace of business expansion. The company now anticipates adding approximately 4,000 to 5,000 net new active locations in 2023, falling short of the earlier target of 6,000 additions for the full year. During the earnings call, Olo mentioned that they faced a longer-than-expected implementation cycle with a major enterprise customer in Q3, which is expected to continue into Q4.
Additionally, there was news that Wingstop, representing a small portion of Olo’s total revenue (less than 3%) and around 1,800 locations, intends to move away from Olo’s platform when their contract expires in Q1 2024. While this is not a large portion of revenue, investors seem nervous that other customers could follow suit. Despite these challenges, Olo’s earnings did feature some positive aspects. Their net revenue retention rate and average revenue per user showed significant improvements in the quarter. The company also exceeded analysts’ expectations for adjusted operating profit and earnings per share. Looking ahead, the revenue guidance for the next quarter surpassed Wall Street’s estimates, and Olo expanded its relationship with FAT Brands, a notable player in the restaurant industry. Overall, though, the results were poor, with the markets likely focused on the revised outlook.
What is the market telling us:
Olo’s shares are not very volatile than the market average and over the last year have had only 17 moves greater than 5%. Moves this big are very rare for Olo and that is indicating to us that this news had a significant impact on the market’s perception of the business.
The biggest move we wrote about over the last year was four months ago, when the company gained 6.1% on the news that analyst Clarke Jeffries of Piper Sandler upgraded the stock’s rating from Neutral (Hold) to Overweight (Buy). The analyst maintained a price target of $9, which implied a potential 34% upside from where shares were traded when the report was released. Jeffries sees the current price as an attractive entry point for Olo, driven by promising contributions from new product categories like payments, loyalty, and analytics. He also sees the expected post-Covid return of digital orders as a long-term growth driver. Furthermore, Jeffries believes that estimates of transaction revenue might be too conservative, with his analysis indicating that less than 5% transaction growth is implied through 2024. He added that Olo’s growth could outperform expectations and potentially reaccelerate next year, reaching a substantial 20%.
Olo is down 35.1% since the beginning of the year, and at $4.30 per share it is trading 51.3% below its 52-week high of $8.83 from February 2023. Investors who bought $1,000 worth of Olo’s shares at the IPO in March 2021 would now be looking at an investment worth $122.59.