Wag! Group Co.: Give This Dog A Bone

"My cats inspire me daily. They inspire me to get a dog!" - Greg Curtis

Today, we look at a small-cap animal services firm that came public during the tail end of the SPAC craze in 2021. The stock is deep in 'Busted IPO' territory even as the company has had two encouraging quarterly earnings reports in a row, and the shares have seen some recent buying from a beneficial owner as well. An analysis follows below.

Company Overview:

Wag! Group Co. (NASDAQ:PET) (heretofore "Wag") is a San Francisco based pet care platform connecting pet parents with services such as dog walking or pet sitting, provided by a network of over 400,000 pet caregivers located in 5,300 communities in all 50 states. The company also operates the nation's largest pet insurance comparison marketplace, a pet pharmacy, and recently entered the pet food and treat category with its January 2023 acquisition of dogfoodadvisor.com. Wag was founded in 2015 and went public on August 10, 2022 when it reversed merged into special purpose acquisition company (SPAC) CHW Acquisition Corporation with its first trade transacted at $7.70 a share. The stock trades at just over $2.00 a share, translating to a market cap of approximately $75 million.

Business Model

The company generates revenue from service and joining fees charged to Pet Caregivers for use of (and to be listed on) the Wag platform; subscription and other fees paid by Pet Parents for Wag! Premium; and affiliate fees paid by third-party service partners based on 'revenue-per-action' or conversion activity from wellness and insurance providers. Wag! Premium members, who comprise 53% of active users - pay $9.99 per month and receive a 10% discount on all services, no booking fees, and 24/7 VIP support.

To further elucidate the business model, the average total booking for a 30-minute walk is $27.16. Of that total, $3.86 (on average) is a tip for the Pet Caregiver; $14.03 is the caregiver's cut; and $1.49 is the average discount for Wag! Premium members, leaving Wag with $7.78 in net revenue for a take rate of 29%. And with an average rating of 4.97 (out of 5) from 11 million plus reviewers, it has been very well-received amongst Pet Parents, who use the service four to five times a month on average. Wag! Premium subscribers use the service seven to eight times a month. Furthermore, Wag receives a Net Promoter Score of 67 from Pet Parents and a 45 from Pet Caregivers. Owing to this positivity, ~70% of new Wag Pet Parent customers from 3Q19 to 4Q21 came via word of mouth, keeping customer acquisition costs low with a lifetime value to customer acquisition cost ratio of approximately eight to one during 2Q22 and 3Q22. This type of service is so 'disruptive' that 90% of its customers never used a dog walker until uploading the Wag app.

Somewhat surprisingly, the walking, boarding, sitting, and training services account for only 38% of the company's topline in 3Q22. The balance is provided by 24/7 expert pet health advice - which is $30 per session - pet wellness plans, and its insurance comparison marketplace, making it the largest pet wellness platform. Owing to their contributions to the topline, Wag's overall take rate is closer to 60%.

Wag's addition of dogfoodadvisor.com provided it with an entrée into the $50 billion domestic pet food and treats market. Approximately one million visitors per month search for the best dog foods, read or provide dog food reviews [I didn't know dogs could read or write!], and received news on dog food recalls. For a total cash consideration of $9 million, the company received over 700,000 subscribers.

Marketplace

With all that said, Wag is not the first or the largest pet services platform. Those distinctions belong to competitor Rover.com (ROVR), who launched in 2011 and generated revenue of $122.1 million in the first nine months of 2022 (YTD22), as compared to the $37.8 million produced by Wag in the same period.

They compete in a $124 billion domestic pet industry (2021), of which ~$10 billion is outlaid for non-medical pet services, such as walking or grooming. However, the opportunity is significantly greater than the current market as friends, family, and neighbors are still (by far) the number one provider of walking, sitting, and kenneling services. Commercial and independent kennels and daycares comprise the majority of the pay-for-service market. The market for daytime services and overnight care may be as high as $79 billion, according to calculations made by Rover.com. The pet wellness opportunity is currently estimated at $34 billion.

If anything good came from the pandemic it was a surge in pet ownership, with one in five households (23 million) adopting a pet in the two years subsequent to the onset of the pandemic, meaning that 70% of households (90.5 million) now own a dog and/or a cat. However, the pandemic was horrible for Wag. With everyone working from home, there was a limited need for its services. Gross booking revenue plummeted 63% from $95.4 million in FY19 to $35.2 million in FY20 and only rebounded back to $47.4 million in FY21. With people returning to the office and traveling once again en masse in 2022, Wag is poised to slightly surpass its FY19 gross bookings level when it reports 4Q22 and FY22 earnings on February 21, 2023.

Share Price Performance

With more U.S. households owning pets and the world returning to normal operations - albeit against a poor macroeconomic backdrop - there are decent tailwinds for the non-medical pet services business. However, Wag's stock has been soundly beaten since its public debut as high-growth, unprofitable technology concerns have been eschewed by the market. It sold off 68% in the back half of September 2022 (ten trading sessions) to $1.96 a share on little volume after filing to sell 13.8 million shares of stock. That proposed transaction has remained on the shelf, but the shares remain at those trading levels.

3Q22 Earnings & Outlook:

From an operational perspective, Wag - unlike many of the SPAC-birthed companies over the past two years - has underpromised and overdelivered. After posting a slightly better than expectations 2Q22, the company did it again in 3Q22, reporting a loss of $0.06 a share (non-GAAP) and an Adj. EBITDA of negative $461,000 on net revenue of $15.4 million versus expectations for a loss of $0.34 on net revenue of $13.0 million. Net revenue improved 161% over the prior year period. Take rate was 61% on gross bookings of $25.3 million, which were up 85% from the prior year period. Pet Caregiver fees to join the platform rose from an average of $29.95 per caregiver in 2Q22 to $41.50 in 3Q22.

After raising its FY22 guidance on its 2Q22 earnings release, management moved it higher once again on November 10, 2022, raising FY22 Adj. EBITDA from negative $9.0 million to negative $5.5 million while its topline was revised from $48.3 million to $51.5 million. Given that its pre-IPO FY22 forecast (made in mid-2022) was Adj. EBITDA of negative $15.6 million on net revenue of $42.0 million, with the company not expected to go Adj. EBITDA positive until FY24, it marked a significant improvement in business trends. Longer term, management believes Wag can grow its topline at ~40% with service take rates north of 40% and Adj. EBITDA margins of ~30%.

Fourth Quarter Results:

The company posted its fourth quarter numbers on February 21st. The company had a GAAP profit of seven cents a share, a quarter a share better than expected. Revenues rose nearly 110% on a year-over-year basis to $17 million, more than $3 million more than the consensus. Management boosted FY2023 sales guidance to a range of $75 million to $77 million, a 7% improvement versus their prior forecast at the midpoint of the range.

Balance Sheet & Analyst Commentary:

The company ended FY2022 with nearly $39 million of cash and marketable securities, which management provided the recent commentary around. 'Our balance sheet remains strong in the context of our operating cash use and puts us in a strong position to comfortably fund our growth objectives, while also maintaining flexibility to pursue strategic M&A when we believe the opportunity aligns with our goals.'

Despite its brutal stock price performance, the Street is unanimously constructive on Wag, featuring one outperform and five buy ratings and a median (and mode) twelve-month price target of $5. In FY23, the Street currently anticipates a loss of $0.15 a share (non-GAAP) on net revenue of $76.5 million, which projects sales growth of nearly 40% over FY2022. In FY2024, they expect PET to get near breakeven status for the year as revenues rise to just north of $95 million.

Beneficial owner ACME Fund, represented on the board by Brian Yee, had added nearly $8 million to their substantial position in the company since February 10th it should be noted.

Verdict:

With pet ownership at an all-time high, Americans returning back to the workplace, and pet care spending no longer 'discretionary', Wag is positioned for long-term growth that should become increasingly resilient to economic cycles. As long as the company continues on its current trajectory, it won't need to tap the capital markets and should become Adj. EBITDA positive in FY23 - possibly becoming non-GAAP EPS profitable. A case for Adj. EBITDA of $30 million on net revenue of $120 million in FY25 can be made.

At two bucks a share, the risk-reward profile appears asymmetrical, making Wag a speculative buy worthy of a small 'watch item' investment for the time being.

"Dogs love their friends and bite their enemies, quite unlike people, who are incapable of pure love and always have to mix love and hate." - Sigmund Freud

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