PAR technology (NYSE: BY) has been one of the winners of the pandemic. Its stock rose from around $11 in March 2020 to over $88 in February 2021, which is an 800% increase in one year. However, the company got caught in the high-growth tech sector, and the stock price has fallen more than 55% from its all-time high, now trading at $38.08. PAR has been around for a long time. The US-based company was founded in 1968 and went public in 1982. It started as a technology entrepreneur and provided point-of-sale (POS) systems to different businesses. However, it received little love as the company was very disappointing and the share price remained stable for nearly 40 years. Current CEO Savneet Singh stepped in in 2019 and decided to turn things around by transforming PAR Technology from a service company into a SaaS (subscription as a service) company. This has resulted in huge success, with over 400% increase in ARR (Annual Recurring Revenue) in less than three years.
Savneet Singh, CEO, on the company’s vision:
We continue to work to advance the corporate catering industry’s vision of self-contained restaurants by focusing on creating a single, cloud-based platform that is designed to empower staff and operations to technology-enabled restoration. Unified commerce connects all customer-facing channels – website, app, stores, third-party deliveries – with a common technology platform based on Open Web standards. This is an evolution in the industry of multi-channel and omni-channel platforms that still forces brands to do the heavy onboarding, often at their peril.
The restaurant and POS software market is also huge as restaurants are now changing their operating system to improve their efficiency. However, even after the sharp decline in the share price, the company is still trading at a premium to its peers which are growing at similar levels. Despite strong revenue growth, profitability remains a big issue. Therefore, I think PAR technology is a hold at the moment and will turn into a buy when profitability improves and valuation becomes more attractive.
PAR Technology operates in the restaurant software and point-of-sale space, which has a huge TAM (total addressable market). This is due to the shift from legacy operating platforms to modern cloud-based operating platforms. Restaurants are now looking for ways to improve their efficiency, and the modern operating system allows them to have a unified platform that consolidates all data. The platform can also meet several needs such as shopping, analytics, loyalty, menu management, etc. It is also able to offer more features such as omnichannel ordering and personalized engagement. According to PAR, currently only about 10-20% of enterprises have migrated to a pure cloud operating platform. I think change will continue to accelerate as restaurants look to move to a more efficient and flexible platform.
The restaurant industry is one of the largest industries in the world. According to Toast, annual sales in the US restaurant industry alone are $800 billion, or 3% of GDP. The TAM for the United States is estimated at $50 billion, while the TAM for the rest of the world is estimated at over $110 billion. The point of sale market is also growing rapidly. According to Markets and Markets, the Point of Sale market size is $15.8 billion in 2020 and is expected to reach $34.4 billion by 2026, representing a CAGR (compound annual growth rate) of 13.9%. This provides a huge market for PAR to grow moving forward.
Savneet Singh, CEO, on market trends:
“We are in an exciting time for our industry, as restaurants large and small transform and modernize to become software-driven digital businesses. Our first quarter results reflect the power of our platform and the “Punchh’s integration with Brink and Data Central and we closed several large brands that chose multiple PAR solutions during the quarter. These recent customer wins demonstrate the growing demand for unified commerce where restaurants need simpler solutions, fewer integrations and more natively unified solutions.
With restaurant software and POS space being such a huge market, the competition is quite fierce. PAR Technology has several competitors, including Toast (TOST), Lightspeed (LSPD), Block (SQ), and Shopify (SHOP). Block and Shopify provide POS systems primarily to SMBs, while Lightspeed POS targets the mid-to-high end niche. Toast is the main competitor that only focuses on restaurants. Both companies have solid, well-rounded products, but they work very differently. Toast targets restaurants of all sizes and offers a free plan to entice customers on board. It then sells different products like marketing and inventory management to customers to increase its ARPU (average revenue per user). While PAR Technology differentiates itself by focusing primarily on the corporate catering market. I think this is a very smart move as it allows them to charge a higher plan and generate more revenue upfront. It also makes them immune to competition from Shopify and Block, as they primarily focus on SMBs. Company restaurants also have higher purchasing power than small and medium-sized restaurants, which gives PAR Technology a higher ARPU.
Finances and evaluation
PAR Technology announced its first quarter results in May and its growth rate remains very impressive. The company posted revenue of $80.3 million, up 47.4% year-over-year from $54.5 million. Gross profit was $20.6 million versus $10.2 million, representing a 102% year-over-year increase. This is largely due to the explosive growth of ARR. ARR at the end of the first quarter was $94.4 million, an increase of 172% from $34.6 million a year ago. Punchh, its loyalty division, recorded annual TAR growth of 39% while Brink, its POS division, recorded annual TAR growth of 35%. The active sites for Punchh and Brink are 58,801 restaurants and 16,945 restaurants respectively.
However, the net result remains quite low. Net loss for the quarter was ($15.7) million, or ($0.58) net loss per share, compared to net loss of ($8.3) million, or ($0. $.38) net loss per share. The Adjusted EBITDA loss was ($2.9) million, compared to an Adjusted EBITDA loss of ($4.9) million a year ago. The widening net loss was largely due to higher R&D spending, which increased 87% year-over-year from $5.8 million to $10.8 million. Operating cash flow was negative ($21.2) million, compared to negative ($3.4) million a year ago. The company’s balance sheet remains strong. It ended the quarter with $163 million in cash and $392 million in debt, leaving the company with net debt of $229 million. However, $387 million of the debt is long-term debt, therefore the company is in no rush to pay off the debt anytime soon.
Despite the sharp drop in the stock price, PAR Technology is still trading at a high level. I am valuing the company using the P/S ratio as it has no profit and positive cash flow at the moment. PAR Technology is currently trading at a forward P/S ratio of 3.2. In the first graph below, you can see that this is high compared to peers. It is currently trading at a 13.7% and 51.4% premium to Toast and Block, respectively. Lightspeed is the only exception, as it grows faster and has a much higher gross margin. In the second and third graphs, you can see that Lightspeed has a revenue growth rate of 77.9% and a gross margin of 49.5%, compared to PAR’s 47.4% and 23.5%. If we compare it to Toast, its closest competitor, we can see that Toast is growing faster while trading at a cheaper valuation. I think PAR Technology should trade at a similar if not lower valuation than Toast as they both have a similar outlook with Toast having stronger growth.
Current uncertainty in the macro-environment may create headwinds for near-term PAR. While high inflation persists, the economy continues to weaken. We are already seeing signs of cracks, with companies like Target (TGT) dramatically lowering their guidance and Tesla (TSLA) starting to lay off employees. Consumer purchasing power has drastically diminished and consumers are now reluctant to spend on discretionary items as most of their budget is spent on essentials. This will hurt PAR technology as restaurants are unlikely to change or upgrade their POS as demand remains low. Current customers are likely to stay due to high switching costs, which will provide some buffer, but the number of new customers is likely to decline, which will slow its growth in the future.
In conclusion, I think PAR technology has a huge opportunity moving forward, but profitability and valuation remain an issue. The company is benefiting from the shift from legacy restaurant software to modern cloud-based restaurant software. I don’t think the change will end anytime soon as restaurants continue to pursue better operational efficiencies. Enterprise TAM remains huge and much of it is still untapped as only 10-20% of enterprises have migrated to a pure cloud operating platform. The competition is quite fierce, but I think PAR Technology has managed to differentiate itself by focusing primarily on the business side. The company is experiencing strong growth driven by the exponential increase in its ARR. However, net loss and operating cash flow continue to deteriorate. It is also trading at a relatively high level compared to Toast, which is growing even faster. Therefore, despite the strong fundamentals, I view the PAR technology as a hold and will revisit it when profitability improves and valuation becomes more attractive.