Why Olo Should Be on Your Restaurant Stock Watch List

One of the most intriguing restaurant stocks to debut in recent years is Olo (NYSE: OLO), a cloud software platform that allows a restaurant to seamlessly interact with customers to take digital orders and process deliveries.

Following its March IPO, Olo has essentially traded flat, but it offers a unique opportunity in the restaurant delivery boom. In this Fool Live segment recorded on July 2, Fool.com contributor Jeremy Bowman and bureau chief Corinne Cardina discuss the prospects for the digital platform.

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Corinne Cardina: Jeremy, we’ve talked about your favorite restaurant stock. Which one would you be buying today?

Jeremy Bowman: Sure, I’ll go into a little detail about Olo now. It’s very expensive. It’s trading in a price-to-sales ratio close to 50, and it is profitable, which is good. Right now for me, it’s on my watch list, I’m going to watch the price. I think that this is really, you think about David Gardner’s rule of looking for top dogs and first movers in an emerging growth industry, I think Olo is a great example of that. They’ve already partnered with 400 brands, including names like Wingstop, Cheesecake Factory, the big fast food and casual dining chains that we all know. Last year, they handled $14 billion in annual order volume. They only get a small percentage of that as revenue. But I think if you compare that to a restaurant, they would be third behind McDonald’s and Starbucks as far as US systemwide sales with a total like that. They’re a pretty big behind-the-scenes operator in restaurants right now and they provide necessary services. They’re handling online ordering, they’re optimizing delivery, scheduling, prices, the interfacing with third-party delivery apps. The SaaS model has been working well for them. They’ve had more than 120% net revenue retention in the last three years, so that means their existing customers are spending at least 20% more with them each year. That’s a good sign. Their revenues are collected through a combination between subscription and transaction-based. Last year, they had about $100 million in revenue. First quarter was great, revenue growth was up 125%. In addition to the price, I’m also cautious because I’m waiting to see how they do now that the pandemic tailwinds are easing off, so their forecast will slow down a lot. It’s hard to say if that’s conservative or not, but good one to watch especially if you’re looking for an angle with restaurant delivery.

Corinne Cardina has no position in any of the stocks mentioned. Jeremy Bowman owns shares of Starbucks. The Motley Fool owns shares of and recommends Olo Inc. and Starbucks. The Motley Fool recommends Wingstop and recommends the following options: short July 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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