Why EverQuote Shares May Remain Low

EverQuote (EVER) shares are down nearly 40% since the start of 2022, which has brought the 14-day Relative Strength Index (RSI) to 25.49. When the RSI is above 70, the stock is generally considered overbought, while below 30 is considered oversold.

I am bearish on this stock.  

About EverQuote

EverQuote operates an online insurance marketplace that allows consumers to connect with insurance providers in the United States.

Almost 80% of its business depends on the automotive industry, while the rest comes from the remaining segments.

EverQuote serves insurance carriers and agents, as well as indirect channel partners.

EverQuote’s headquarters are in Cambridge, Massachusetts.

Q1 2022 Results

Headwinds from the hardening auto insurance market have held back revenue growth, which came in at 6.6% year-over-year in the first quarter of 2022.

However, the company beat analysts’ average revenue forecast by $8.47 million in the first quarter of 2022, while posting $110.7 million.

EverQuote’s GAAP results were negative as the company suffered a net loss of $0.19 per share, but beat estimates by $0.08.

Adjusted EBITDA was $2.4 million, down from last year’s adjusted EBITDA of $4.8 million.

The company expects second-quarter 2022 revenue to be between $92 million and $97 million, and full-year 2022 revenue to be between $400 million and $420 million.

Profitability Ratio

The profitability of EverQuote’s operations needs to improve significantly.

Relevant financial indicators are all negative, except for the 12-month gross profit margin of 94.36% compared to the industry median of 50.99%, and 12-month leveraged FCF Margin of 5.51% versus the industry median of 10.57%.

The EBITDA and net income margins are -4.88% and -5.02%, respectively, versus the industry medians of 9.95% and 20.77%.

Additionally, the 12-month return on common equity is -23.93% versus the industry median of 6.01%, while the 12-month return on total assets is -14.97% versus the industry median of 4.39%.

For the reasons explained below, the auto insurance industry is likely to experience a downturn as the demand from carriers will suffer from expected lower sales volumes of new vehicles.

Higher rates will trigger an increase in premiums and broaden EverQuote’s profit opportunities, but this will have a small offsetting effect on the loss of demand from insurance carriers that should arise.

The Future is Challenging

As interest rates continue to rise to counter inflation, macroeconomic variables are likely to move in a way that will not support the auto industry.

Higher borrowing costs will certainly not be an incentive to buy a new car. Even increased fuel prices, influenced by the long-term factors of the war in Ukraine, are likely to weigh on the outlook for the automotive sector in the coming months.

Inadequate inventories relative to current demand are a problem, as is automakers’ inability to ramp up production due to the ongoing auto parts supply problem, both of which are driving car sales down.

In April 2022, light vehicle sales fell by 22% compared to the previous year.

Given this outlook, analyst estimates of around 18 million total U.S. vehicle sales in 2023 appear overly optimistic.

However, they would still be below the April 2021 peak when 18.5 million vehicles were sold, among other things benefiting from some incentives distributed during the COVID-19.

A tighter monetary policy will also not benefit the demand for home and renters insurance, as higher interest rates on bank loans do not encourage people to buy new homes or move to a larger home.

Additionally, EverQuote’s life and health insurance business is too small to impact the company’s growth prospects.

Deteriorating Balance Sheet

The current financial position is $46.13 million in cash and cash equivalents and $170.53 million in total assets versus $68.1 million in total liabilities. Total equity is worth approximately $102.44 million.

The financial condition would be much stronger if EverQuote’s weighted average cost of capital, which currently stands at 6.84%, was offset by EverQuote’s higher return on investment, which is currently negative at 28.97%.

This relationship shows that the company is not generating positive returns, which (of course) does not match its cost of capital.

Wall Street’s Take

In the past three months, seven Wall Street analysts have issued a 12-month price target for EVER. The company has a Moderate Buy consensus rating based on four Buys, two Holds, and one Sell rating.

The average EverQuote price target is $16.80, implying 71.8% upside potential.

Valuation

EverQuote has a market cap of $306.8 million, and the stock has a 52-week range of $9.38 to $35.80.

The stock has a price/book ratio of 3.79, a price/sales ratio of 0.73, a price/cash flow ratio of 53.1 and a price/free-cash-flow ratio of -20.6.

Conclusion

The outlook for the automotive industry will be challenging, which means tough times for vehicle insurers as well.

The share price, which has fallen sharply this year, has little chance of reversing the trend.

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