Phiwath Jittamas
Overview
MediaAlpha, Inc. (NYSE:MAX) has 24% upside. Insurance companies are looking for ways to improve their return on investment in marketing as customer acquisition costs rise. MAX’s platform is well-suited to address these challenges by helping buyers target high-quality leads and increase ROI, while also providing suppliers with the tools they need to attract buyers with strong intent and increase their yield. The platform is powered by predictive analytics algorithms that provide buyers with real-time insights on how to optimize the value of each opportunity.
Overall, MAX’s proprietary platform, data integrations, and advanced data science and predictive analytics capabilities make it a strong choice for insurance companies looking to improve their customer acquisition efforts.
Business description
MediaAlpha’s platform facilitates interactions between insurance providers and policyholders in a direct, open, and results-oriented system. The company serves as a digital customer acquisition platform for the insurance industries of property and casualty, health, and life.
Cost of customer acquisition in the Insurance industry is increasing
The insurance industry is one of the most substantial in the United States, with healthy market fundamentals and promising growth prospects. Demand for insurance is stable because many people are required by law or receive financial assistance to purchase coverage. However, the industry is extremely competitive because of its lucrative nature, and firms are making significant investments in acquiring customers.
More and more insurance firms are allocating resources toward customer acquisition because of the rising number of people who do their insurance shopping online. Customers are using the internet not only for information gathering and comparison shopping, but also for actual insurance purchases. Ninety percent of consumers are open to purchasing auto insurance online, per the J.D. Power 2020 U.S. Insurance Shopping Study. Ten years ago, 35% of consumers who had never bought an online auto insurance policy before said they were considering doing so, according to the Comscore 2010 Online Auto Insurance Shopping Report.
Rising customer acquisition costs are a shared feature of these and other long-term tendencies. Since it is becoming more costly to acquire customers at scale, carriers and distributors are putting more effort into maximizing the efficiency of their customer acquisition budgets. Low marketing return on investment is, in my opinion, caused by a lack of ability to track the effectiveness of customer acquisition across different mediums and marketing events. Therefore, I believe it is preferable to implement more sophisticated methods of customer acquisition made possible by data. Consequently, I anticipate a rise in interest about how to get better transparency into the quality of referrals, how carriers can get better referrals online, and how to manage customer acquisition cost [CAC] across various vendors from a single location.
MAX is well positioned to ride on these secular trends
MediaAlpha can profit from these trends because of their prominent position. In my opinion, MAX provides insurance companies and distributors with the best available technology platform for acquiring customers at scale through the internet. With MAX, purchasers can more precisely hone in on their ideal clientele and set prices in accordance with the relative value they assign to different demographic groups. Using MAX’s advanced data science and predictive analytics tools, buyers can boost ROI by targeting only the highest-quality prospects. Consequently, MAX is able to entice more buyers into the ecosystem through improved efficiency in customer acquisition and increased ROI. Meanwhile, MAX equips suppliers with the data and tools needed to compete for high-intent consumers and increase their yield, luring more suppliers into the ecosystem and giving buyers access to a wider variety of quality demand.
The more partners who see the value in MAX, the more integrations MAX will make to bring even more data into the platform. The cumulative effect is like a powerful flywheel.
S-1
Proprietary platform that collects tons of data to enhance the flywheel effect
Due to the adaptability and scalability of its proprietary platform, MAX is able to rapidly and effectively create tailor-made solutions to meet the changing requirements of its partners. Predictive analytics algorithms power the MAX platform, which in turn enables it to provide buyers with constant, real-time feedback and perspectives into how to maximize the value of each opportunity.
Further, by leveraging millions of de-identified data points, MAX deep data integrations allow buyers to target and acquire their target clients with unparalleled control and accuracy. On the other hand, MAX provides its supply partners with state-of-the-art, data-driven instruments for managing yield and monetizing that yield. These capabilities, which allow for the utmost in business performance and revenue maximization, are, in my opinion, crucial to the success of partners’ monetization plans. The MAX platform’s neutrality toward industry verticals further facilitates the company’s expansion into new markets.
As more people use MAX’s platform, I’m confident that more useful information will be produced, that feedback loops will be strengthened, and that the ecosystem as a whole will benefit as a whole. This would result in an even greater flywheel effect for MAX.
Strong relationships with insurance companies are a unique B2B marketing strategy
MAX has built strong connections with insurance companies and distributors over the years, and these parties are now active market participants. I think this is a strong endorsement of MAX’s appeal to the insurance market as a whole. By providing granular transparency, controls, and predictive tools that drive measurable superior performance, MAX enables insurance carriers and distributors to optimize customer acquisition spend for buyers. However, sellers can use MAX to get the most out of their customers by turning high-intent policy shoppers who aren’t likely to convert with that particular carrier into highly referrals for other insurance firms.
In my opinion, MAX platform is popular among insurance companies and brokers because it makes it easy to manage the entire process of acquiring and monetizing digital customers. As stated in the S-1, MAX platform is used by 15 out of the top 20 largest auto insurance carriers, as measured by customer acquisition spend.
Insurance spent to recover in FY23
Overall, MAX’s 3Q22 results were better than expected, but the company’s revenue was down 42% and adjusted EBITDA was down 84% from the prior-year period due to reduced spending by P&C carriers. In spite of management’s optimism regarding P&C carrier spending prospects through 2023, a non-linear recovery is likely given that carriers are at different points in the recovery process. This is in line with what competitors such as EverQuote, Inc. (EVER) are saying, though P&C carriers make up a larger percentage of MAX’s business, so it is affected more severely.
Although I anticipate that the insurance cycle will remain challenging for MAX in the near future (4Q22), I do think that MAX is well positioned for the eventual recovery. Management, meanwhile, is concentrating on the things it can influence, like maintaining the 3Q’s positive profit and free cash flow.
Forecast
The underlying secular trends for MAX are positive, but I believe FY22 is going to be a major down year (LTM3Q22 is down 53%). I expect MAX to see a recovery in growth in FY23, as per management guidance. Also, MAX should gradually improve margins back to historical levels as top line recovers. I have assumed margins to reach slightly above FY2020 levels, but will not be surprised if MAX exceeds this.
MAX is currently trading at 18 times forward EBITDA. I believe MAX should be able to sustain its valuation as it sees growth recovery in FY23. With these assumptions, I believe MAX is worth around $12.34, or 24% more.
Author’s estimates
Key risks
Invisible cap to margin expansion
High revenue share payouts mean that MAX’s margin upside is constrained, and the company may experience near-term EBITDA and contribution margin compression despite its high operating leverage and incremental margins.
Dependent on market cycles
The insurance sector is growing, but it remains susceptible to market cycles like the one we’re currently experiencing (rising rates environment). Due to its high correlation with the P&C sector, MediaAlpha, Inc. would suffer if the sector underperformed.
Conclusion
Customer acquisition costs are increasing, and insurance companies are looking for ways to maximize the efficiency of their customer acquisition budgets. The combination of MAX’s advanced data science and predictive analytics tools, proprietary platform, and deep data integrations make MediaAlpha, Inc. a compelling solution for insurance companies looking to improve their customer acquisition efforts.
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