Can GoCompare disrupt the price comparison sector?
Few of us love household admin and even if we did, even fewer of us are blessed with huge amounts of time to devote to it no matter the savings we could achieve.
It’s no wonder that a new platform which could take the stress out of switching energy, broadband, insurance and financial services providers is generating excitement about the investment case at price comparison site GoCompare (GOCO).
In this article we will look in detail at its WeFlip service and consider whether the internal and external hype over its potential is justified.
GOING FOR A SONG
Probably best known for its irritating adverts starring opera singer Gio Compario, the company was previously owned by Esure but became a separately-listed company in November 2016. Its shares hit a peak of 143p in summer 2018 after it rebuffed a takeover offer from property listings site Zoopla.
The shares have since subsided thanks to fears over a possible competitive threat posed by Amazon plus factors such as the impact of falling motor premiums on the wider insurance market, and a plan to protect margins by cutting marketing spend and thereby surrendering market share.
In March 2019 the shares were boosted by insurance industry guru Peter Wood growing his stake in the company.
Wood, the founder of Direct Line (DLG), Esure and Sheila’s Wheels, has been involved with GoCompare since its acquisition by Esure in 2014 and currently sits in the chairman’s seat.
Stakebuilding took Wood’s holding from 25.6% to 29.9% and at the time he outlined his excitement over the automated energy switching venture. Subsequently the company spelled out its plans in this area at an investor day on 20 March.
WHAT IS WEFLIP?
GoCompare sees WeFlip as a way of reaching beyond the 20% of consumers which in its parlance are ‘Savvy Savers’ to those who rarely or never switch providers.
Customers complete a quote form for their first ‘flip’ and then confirm they are happy for the service to act as their agent. Once the customer is signed up in this way their preferences will be collected and WeFlip will monitor the market to identify the best deal.
If the customer’s current tariff is the best one available then nothing changes, but if WeFlip finds a better deal the customer will automatically be switched.
Officially launched in January 2019 (after a soft launch in October 2018) WeFlip is currently focused on the energy market but the company sees potential for a similar approach in other areas including broadband, insurance and credit cards.
The hope is that WeFlip will help GoCompare supplant the typical price comparison approach – which has limited barriers to entry and involves heavy marketing spend to compete for the attention of those which do switch – to create a subscription-based savings-as-a service model with higher levels of retention and lower marketing costs and ultimately a higher quality of earnings.
To be clear, the consumer would not be charged for this ‘service’ as GoCompare’s revenue would come from the supplier.
COULD THE COMPANY TRADE ON A HIGHER VALUATION?
The whole plan is underpinned by the company’s proprietary SaveStack technology platform. If successful, and it remains unproven at this stage, the strategy could see the company rewarded with a more premium stock market valuation.
Despite a recent modest recovery in the shares, they still trade on a low price-to-earnings (PE) ratio of 12.7-times. By way of comparison rival Moneysupermarket (MONY) trades on a PE of more than 20-times.
GoCompare’s management appear to be flagging 2022 as the point at which its savings-as-a-service approach will have transformed the business and analysts have done some number crunching on the likely financial impact.
Liberum analyst Ian Whittaker remains a bit sceptical: ‘Our view is that only a minority of consumers will be willing to give WeFlip the authority to switch services automatically and that energy companies, and others in the future, will be wary of signing up for a service that dramatically facilitates switching.’
This underpins a forecast for WeFlip to generate £17m or 9% of group revenue by 2022. Whittaker notes that if this proves overly-cautious and the service was to generate £40m of revenue in 2022, earnings per share forecasts for 2022 would be increased by 25%.
THE BULLISH VIEW
Whittaker’s counterparts at investment bank Berenberg are more bullish. Its analysts say: ‘If the price comparison website model could engage those infrequent or non-switchers to switch their energy bill once per year, this would open a £3bn market opportunity across car insurance, home insurance and energy (gas and electricity) alone.’
By expanding into new areas like broadband, mortgages and mobile, GoCompare ‘will ratchet up the average revenue per user and thus have a multiplier effect on the revenue model’, they add.
Both Berenberg and Liberum see the required investment in a roll-out of WeFlip and in marketing the proposition as constraining earnings in the short-term.
Given there is nothing to stop its peers attempting something very similar, GoCompare may need to move fast to fully exploit its first mover advantage.
SHARES SAYS: Any new venture involves material risks but for investors comfortable with that reality, there appears to be relatively little in the share price to reflect the launch of a new product for which logically you can see a significant appeal to consumers.
Buy at 86.9p.