Rover Group: Disrupting The Legacy Pet Care Industry (NASDAQ:ROVR)

Overview

Rover Group (NASDAQ:ROVR) is currently undervalued by ~40%. As a leading online pet care marketplace in the industry, ROVR has shown stable and significant growth over the years. It has been evident that the demand for pet care services has grown tremendously, and ROVR has become the major go-to solution for pet care, meeting each specific and essential requirement. Further strengthened with its data scale that makes superior algorithms, ROVR is able to beat potential red flags such as the nascent industry and risk in brand image. I think ROVR’s intrinsic value is about $6.02 in FY24 compared to its share price of $4.28 today.

Business description

The Rover Group is an online pet care marketplace. ROVR connects pet owners with pet caretakers who offer daytime services (like dog daycare, dog walking, and drop-in visits) and overnight services (like boarding and in-home pet sitting).

The pet services market is big

Due to the difficulties inherent in providing traditional pet care services, I believe there’s now a small commercial market for pet care. ROVR data shows that over 67% of first-time Rover customers had never paid for pet care previously. As a result of being dissatisfied with the commercial solutions available to them, customers have often turned to their social networks for help with pet care. In my opinion, this latent demand creates a tremendous growth possibility for the pet services sector as a whole. It was estimated by management that the current total addressable market was over $79 billion, with around $69 billion in overnight services and around $10 billion in daytime services (source: S-1).

Each existing care option has its drawbacks, especially for the millions of pet parents who are worried their pet will not receive adequate individual care or human attention due to their vacation plans or busy schedules.

1. Most pet owners rely on favors from friends and family for temporary pet care, but this can lead to feelings of social shame and the need to repay the favor. To ensure a comfortable and familiar environment for their pet, owners often choose members of their extended family and neighborhood. Since the service is being done as a favor instead of for money, the pet owner may not feel comfortable asking for or giving a certain level of care.
2. Small businesses and sole practitioners typically don’t have a website and rely instead on word of mouth and traditional advertising methods like flyers and newspaper ads. As a pet owner, it can be challenging to know what options are available, whom to contact, and whom to rely on.
3. Large commercial providers, like kennels and daycares, can’t cater to each pet owner’s specific requirements. Firstly, they tend to be somewhat pricey. Second, many pets simply can’t handle the hectic atmosphere of major hubs. Lastly, pet owners may worry about how well their animals will be cared for at a place that is in business to make money.
4. In addition to niche websites, pet parents can use online aggregators and directories like Craigslist, Nextdoor, and Yelp to locate pet care services in their area.

Rover addresses the headache of pet owners

The platform offered by Rover does a better job of meeting the essential requirements of pet parents. ROVR provides:

1. A cheerful, stress-free environment for pets. Parents’ concern for their pets’ well-being during their absence makes this a priority. This is important because pet owners care about how their animals feel when they aren’t home. While pet webcams and similar inventions are one way that businesses are responding to pet parents’ concerns, they typically want more assurances.
2. Peace of mind knowing their pets are receiving the highest standard of care possible and special attention from the staff. Pet owners want the option to pick their service provider with care and the assurance that their pet will receive personal attention. Additionally, they’re concerned about the availability of support services in the event of an emergency when they’re away from their pets.
3. Technology has made it simple to access and manage. Pet owners nowadays anticipate being able to quickly and easily use their computers and mobile devices to locate service providers who can meet their pets’ demands. To ensure their pet is well cared for and has a good time while they’re away, pet owners want an easy way to get in touch with potential pet care providers, arrange for services, pay for them, and stay connected.
4. Care that is both affordable and convenient for pet owners. Though many pet owners frown at the cost of commercial options, they value their pets’ health and happiness enough to shell out the cash for quality care if it’s offered. For some pet owners, the price of reliable, trustworthy, and kind care is worth it, especially for their pets’ special needs.

Rover is the go-to-solution for many pets’ owners

There are many reasons why ROVR is the go-to solution, and I believe one of the key reasons is that each pet receives ROVR’s personalized care. Rover’s primary offering to pet parents is access to a large selection of pet care professionals. Thanks to ROVR, families may pick providers who are suitable for their pets’ needs, depending on factors like the size of the home, kids’ presence, access to a yard, and so on.

Pet parents can choose caretakers who will let their pets on the bed or the furniture. To ensure that each pet receives the best possible care, ROVR urges pet parents to submit information about their pet’s likes, dislikes, eating patterns, and endearing quirks. I agree that with this, pet owners may provide their furry buddies with the loving care they’re used to receiving from friends, relatives, and neighbors while remaining in a setting where they feel safe and in control of their pet’s care.

Verifiability is the next essential reason. During the course of a booking, many pet parents appreciate receiving updates about their pet in the form of photos and videos from their pet caretaker via the Rover app or online. Over a hundred million images have been uploaded and shared using ROVR so far. Dog walkers can also exchange information with pet owners by mapping their routes. Aside from the instant happiness that comes from seeing their pet’s happy face while they’re away, this gives pet owners a sense of security and confidence.

Finally, the cost is always a consideration. At whatever price point, ROVR provides superior service. Pet owners often find that the services offered by pet care providers are of higher quality and more reasonably priced than those offered by traditional businesses. Rover also has a number of extra services for pet owners, like massages, home-cooked meals, and training.

Largest number of high-quality pet care providers

As far as I can tell, the Rover platform is attracting a lot of interest from pet care providers. Gaining more bookings allows pet care providers to increase their income and fine-tune their listings to attract the kind of clients they want without reducing the quality of the matches they receive. For instance, if a pet care provider has enough positive feedback and repeat customers from Havanese dog owners, he may eventually be able to limit his reservations to just those pets.

Being able to cater to each pet care provider’s individual preferences leads to high levels of provider loyalty and satisfaction. Those in the pet-care industry find and stick with the ROVR platform on their own. For example, research conducted by ROVR reveals that 70% of its suppliers obtain three or more reservations within their first 12 months on the platform. To a greater extent than 90%, providers in this category see recurring business from previous clients in year two compared to year one. A greater percentage of revenue retention is kept by ROVR in succeeding years.

ROVR’s scale provides better data to make better matches

Rover can constantly enhance its platform’s matching capabilities thanks to the size and breadth of its network of pet care providers and the development of the company’s algorithm. ROVR has prioritized connecting each pet parent’s unique requirements and preferences with the best pet care provider rather than simply investing in marketing to expand its market. Therefore, according to ROVER’s S-1, first-time users of Rover during the three months ending September 30, 2021, were almost 10 times more likely to find and book with a pet care provider than first-time users in 2012.

Forecast

Based on my investment thesis, I expect ROVR to continue growing at a high rate, similar to what the consensus is estimating over the next few years until 2025. I used a revenue valuation method to value ROVR as it’s unlikely to hit management’s long-term guidance of 30% EBITDA margin anytime soon. Looking at its forward revenue multiple, it has been beaten down by 50% (from 5x to 2.5x) since the start of the year. While I believe the sell-off is not justified on a fundamental level, it’s safer to assume that it will stay at 2.5x than increase back to 5x.

Based on the above assumptions and an NTM revenue of 2.5x, I came up with an intrinsic value of $6.02 in FY24. This is ~40% more than the current share price of $4.28.

Red Flags

Nascent industry

ROVR’s business could be significantly harmed if there isn’t a sustained increase in the use of pet care online markets, which are still in their infancy.

Brand reputation is very important

ROVR’s success is highly reliant on the feedback of pet care professionals and pet parents who use the site to share their experiences and spread the news about ROVR. The platform’s or company’s image may take a hit if people have a bad impression of ROVR.

Conclusion

ROVR is undervalued at its current share price as of the date of this writing. Just like how online shopping has become in demand, the online marketplace to find the best pet care providers has grown into an in-demand niche. Pet owners have become more willing to avail themselves of services to meet their pets’ happiness and special needs. ROVR’s reputation excels among both pet parents and pet care providers, and its ideal market position enables it to overcome obstacles such as the nascent industry and the risk to its brand image.