Problems at Porch Group (PRCH)
Part 1: A rollup with aggressive accounting, a questionable business model, and a CEO who is potentially misleading investors
ManBearChicken has published Part 1 of its investigation into Porch Group (PRCH):
Executive Summary (see presentation for detail)
PRCH exemplifies the SPAC bubble. It is a disjointed rollup that has been around for 10 years in search of a sustainable model, struggled to raise money in the private markets in a frothy VC environment, and had a going concern warning before the SPAC merger. Today, Porch is being valued at ~4x the 2020 Series C round, which was a meaningful down round.
PRCH claims to be a “Vertical Software and InsureTech” company with 90% recurring revenue. The real business mix appears significantly lower quality.
Investors may not realize that ~20% of revenue is recognized on a gross/pass-through basis. This low/negative gross margin business appears to be driving an outsized portion of PRCH’s reported revenue growth.
Segment margins, contribution margins, and unit economics are inflated as PRCH allocates significant Selling & Marketing and Product & Tech costs in “Corporate.”
PRCH’s core “concierge” team (60% of total company headcount) is an outsourced call center in Mexico staffed with independent contractors. This is an area of high regulatory/compliance risk. We believe PRCH’s leads are “cold” and thus PRCH is forced to outsource its core concierge team to independent contractors in Mexico in an attempt to make the economics work; but even despite this outsourcing, PRCH is unprofitable.
PRCH claims to have built “integrations” with service providers; primary research shows many of these integrations do not exist.
PRCH’s entrance into insurance is concerning. We are about to find out what happens when a company with a long history of aggressive and potentially unethical behavior attempts to turbocharge revenue growth by underwriting insurance in markets they have no experience in.
PRCH’s claims of a data advantage in insurance underwriting appear misleading. Primary research indicates PRCH does not have the “data” or technology they claim they have.
PRCH’s claims of “zero CAC” are not credible. What Porch really seems to have is a low “cost of acquiring consumer phone numbers and email addresses.” Porch walks a regulatory tightrope in how they obtain and use customer phone numbers and email addresses.
PRCH’s claims of “no competition” appear misleading. PRCH is an imitator of many companies with the same “moving concierge” business model. Multiple competitors appear better positioned than PRCH.
Recent employee reviews tell the story and are shockingly consistent - highlighting alleged unethical practices, cold leads, constant pivoting and pumping up new dreams for investors, revolving door in key finance/legal roles. CEO Matt Ehrlichman has run the same playbook for 15 years - acquire low quality assets, invest little in integration and product development, keep expanding the TAM/investor pitch.
We believe PRCH is worth between $0 and $5.80 per share.
We recommend investors do their own primary diligence before going to Matt (CEO) for “answers.”