Should You Buy This Hot IPO Now?

Many hot initial public offerings (IPOs) over the past few years have jumped immensely on their opening days, and the newly public company Expensify (EXFY) is no exception. Shares were priced at…

$27 ahead of its market debut Nov. 10, and it proceeded to surpass $41 — a 52% jump.

This expense management software tool has something many IPOs in 2021 and 2020 don’t have: profits. Does that mean you should put this company on your watch list?

What does Expensify do?

Expensify operates in the expense management market, offering software to mid-market companies so they can manage their money and employee expenses. The company was built on ease-of-use, making sure customers can spend less time managing company expenses and more time growing their business. Expensify has a wide offering of products, from SmartScan expense management (where employees can simply take a picture of a receipt to be reimbursed), to bill paying and invoices.

What really makes this business special is its strategy to acquire customers. While most expense management companies target executive teams and accounting firms, Expensify focuses on the everyday employee. By offering a free introductory solution that targets individual employees, Expensify hopes to generate hype inside a company from the bottom up. So far, it has been paying off: The company has 639 paying members.

This space does not come without competition, however. The company faces all different types of competition, ranging from large businesses like Intuit to fast-growing start-ups like Certify and Zoho Expense. Some of the larger companies have broader offerings with larger cash balances to fuel growth, while others focus on more stable customer bases like the enterprise market. The key differentiator for Expensify, however, is its bottom-up approach.

A profitable IPO?

While it shouldn’t be a major surprise for an expense management company, it is handling its own expenses very well. Expensify has managed to keep its marketing and administrative expenses low, enabling it to nearly triple its research and development budget. The company spent just $7 million in sales and marketing expenses so far this year — representing just 14% of gross profit. This helped Expensify obtain $14.6 million in net income in the first six months of 2021. The company’s gross margin is also at an impressive 77% while its free cash flow generation is riding high at $21 million so far this year.

Revenue growth is accelerating for the company, but its full-year growth is not as high as many software-as-a-service (SaaS) investors might like. From 2019 to 2020, revenue grew 9%, but that accelerated to revenue growth of roughly 60% in the first six months of 2020 compared to the year-ago period. While this might be much more appealing, it is important to remember that…

 

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