Summer Series: Douugh Ltd (ASX: DOU)

Bryce Leske: [00:00:57] Welcome to the Equity Mates Summer Series of 2020, brought to you by Super Hero over 12 episodes, we're going to be diving into some of Australia's largest and most well known companies as selected by you. The Equity Mates community will be unpacking the company, its industry, the outlook and also some of the key financials. And in some instances, we'll also be taking the tough questions straight to the CEO. So stay tuned for that. To do this, as always, I am joined by my Equity Mates Ren. How's it going, bro? [00:01:26][29.2]

Alec Renehan: [00:01:26] I'm very good. Bryce continuing to enjoy this summer series and I'm really trying to avoid saying the word excited. [00:01:32][5.9]

Bryce Leske: [00:01:33] Like we would review that when we're on holidays as to how we can continue your excited ness in 2021. But anyway, you're right. Here we are again for the second episode of the summer series for 2020. Today we are going to be diving into DDO recently listed on the stock exchange to a bit of hype and fanfare. So we're going to be unpacking all things DDO. The ticker is DOU. Its spelling is DOWGH. [00:02:02][28.4]

Alec Renehan: [00:02:11] yeah. And when you say it's listed with a bit of fanfare, it's what are a few hundred percent from when it listed in what, October. So a fair bit of fan. A lot of fanfare. [00:02:22][10.5]

Bryce Leske: [00:02:23] Trading sideways a little bit at the moment now but it certainly hit the ground running. Yes. So thirsty for Australian fintech. Certainly got behind it and it ran. But anyway Ren. So as always, this episode we're going to be touching on the company summary industry and competitive context, its outlook and future plans, a bit about its financials. And then we'll have a crack, if possible, at the valuation side of things. As a reminder, this is not a buy, hold or sell recommendation, purely just an insight into how we think about companies and doing our research. As always, though, for this series, we have had help from the Equity Mates community and it is a massive thanks to harsh one of the members of the community who has helped us with the research on this one. So big shout out to harsh. Thank you very much. So Ren [00:03:12][48.8]

Alec Renehan: [00:03:12] Doe. Yeah, so doe what is and what isn't it in the company summary. So DOE is a fintech platform. A financial wellness platform is how it pitches itself. And although it's based in Sydney, it's an Australian company and Australian stock, it currently operates in the US and it has plans to launch in Australia in early twenty twenty one. So while you can invest in it, you can actually sign up to it if you're an Australian at the moment. But essentially what it does is it uses its platform and its app and some proprietary, I guess they call it IOI, but some proprietary technology that they've built to help their users manage their finances. You know, it helps, you know, make your savings goals, allocate your money properly, make sure you're on top of your bills and your expenses, track your spending and put money away to invest. So that's sort of what it tries to do. It's often called neo bank. And for those unfamiliar with neo banks, I guess in a nutshell now banks are a new generation of technology driven banks that are really trying to disrupt the traditional banking business model and really trying to cut a lot of the fat out of the traditional banking business to offer better interest rates, better financial products to their users. People may be familiar with companies like EXI NJ. How would you Zynga. Eighty-six 400 or volt there some of the bigger, newer banks in Australia in terms of how big they are. One Australian bank judo raised four hundred million dollars in a funding round. So like it is now, our banks are coming. A bit of the shine has been taken off them recently. Vaults had to raise venture capital around it, a 50 percent discount to a previous round. So it's a bit of up and down. The narrow bank model, though, is often lumped in with these neo banks. The one really important thing to understand from the outset is that dough isn't a neo bank in the sense that it holds people's money. Rather, it partners with banks and other companies and stuff like that. And really its core product is not the banking service itself, but this technology platform. The software helps you manage your money. Yeah, yeah. So I think very clear distinction. That's an important distinction at the start. And there are some benefits to that, like the regulatory hurdles, the cash that it requires to to have, you know, as a bank. There is a lot more things that you need to do, I guess as a technology partner to banks, that's a little bit easier to maneuver. So that's an. Distinction that we hit from the outset, I think, [00:05:58][165.7]

Bryce Leske: [00:05:58] yeah, it is, and I'm wondering if they've chosen to do that purely because they want to avoid the regulation that comes with operating as a bank in its sort of purest sense. If you're needing to partner with actual major banks, then I guess you're relying on their services to actually give customers what they want. [00:06:15][16.4]

Alec Renehan: [00:06:15] Yeah. So I think it's a double edged sword. On the positive side, it's a capital light business model because you don't have the capital requirements of a normal bank and stuff like that. But on the other side, you are reliant on third parties. So there's positives and negatives to give you an idea of the negatives. One of the key enablers of Dollars US platform is a company called Played or Plaid Pale Day, and they've run into some problems and are now subject to multiple lawsuits and at least one class action. And so whilst they're not specifically related to DOE in any way, DOE is reliant on them in some senses. So there's like an entanglement problem. Sometimes if you're not doing everything yourself, you're reliant on other people. And yes, that's never the best. So don't think of it as like a technology platform or financial wellness platform to wrap up the company summary, its IPO in Australia in October, early October is up a few hundred percent from listing. As we touched on, we've touched on the fact that it's not a licensed bank and the way it pitches itself is really trying to use AI to achieve better financial outcomes for its users. [00:07:26][70.5]

Bryce Leske: [00:07:26] Yeah, broadly speaking, I like where all these companies are trying to go. I personally don't use any of them. I don't like the idea of having to sign up for more stuff. I also think that I think I manage my money reasonably well, so I don't feel it's a need for me. But I am interested to see how these grow and how they really utilize I to help people, I guess, manage the flow of their money better. [00:07:51][24.8]

Alec Renehan: [00:07:52] Yeah, yeah. I think you're probably not its target market, given your incredibly complex spreadsheet that you use to track every cent that comes in. You know, you've got your gambling bucket, you've got your savings bucket. [00:08:04][13.0]

Bryce Leske: [00:08:05] You're not sure. Anyway, let's move on to the industry and its competitors Ren. So it is in the fintech industry, which I guess makes some of its direct competitors, you know, some of the traditional banks, even though it's not a traditional bank, it will be partnering with the Nayo banks that will be competing with the likes of CBA, Westpac, NAB, ANZ. And then, as you said, Zinga is a Nayo bank that's up and running here in Australia. A couple of our mates actually use it. Eighty-six four hundred and up are also in the Nayo bank space here. I wouldn't be surprised, honestly, if the Big Four eventually go down this track themselves. [00:08:44][39.0]

Alec Renehan: [00:08:45] This is what I was going to raise. But let's finish on the competitive set. So really, I think there's there are three buckets. There are the traditional banks. So the Sabah's, the ANZ, the NAB in Australia, in America, the Wells Fargo's, the Banks of America, stuff like that. So you traditional banks is bucket one bucket too is full like the full Neoh banks. So as you said, the eighty six for hundreds and the vaults of the world and then bucket three I think is like other financial wellness technology platforms that exist. One that I used to use back when I was at uni was pocket book. Did you remember that one. I do remember, yeah. Yeah, yeah. So they're, they actually owned by Zipp like the by now Pilatus stock. But yeah. Like there are other technology platforms that aren't banks but try to, you know, help customers, help users manage their money and sort, you know, their cash flow and stuff like that out. So I guess for me conceptually, there's three buckets of competitors they're really competing with. But to your point, especially in the more traditional banks are really starting to play in the financial wellness apps space, like I'm a Commonwealth Bank user and the amount of functionality they're building into their app, things like, you know, has your cash flow gone for the last month? Like what does your portfolio look like? You know, all that stuff is starting to really be built out on the app and they're trying to push it to their app users. So those services are offered for free by the traditional banks. So that one is going to be an interesting one to watch. [00:10:13][87.8]

Bryce Leske: [00:10:13] Yeah, I think it would be a miss from them to not play in this space, given obviously there's huge demand from consumers. And it's clear that, you know, financial literacy overall across the world is not amazing and, you know, it's playing in these spaces. So I wouldn't be surprised. Yeah. If the big four continue to build and compete with these guys. [00:10:34][20.9]

Alec Renehan: [00:10:35] Yeah. I mean, this is me making a bold prediction and we love bold predictions on the show. And I'm not going to say it's the most likely outcome, but here is a possible scenario that plays out for Dollars is they actually do have something proprietary in their eye and their technology that is quite valuable. And one of the big banks decide that they want to play in this space. More and dough becomes a pretty natural acquisition target for big time traditional banks. Yeah, that's my bold prediction. By the end of 2020, TODO has had at least one acquisition attempt from a traditional bank. [00:11:09][34.4]

Bryce Leske: [00:11:10] OK, save that for actual bold, bold predictions. So the overall market itself is growing pretty rapidly. So it's you know, we talk about finding companies in industries that are going to be meaningful over the next, you know, 10, 20 years. And this is, you know, the fintech space is certainly an industry that is providing growth opportunities for investors. So that's what I kind of like about this space. It is very early days with a lot of these companies. So the battle for who is going to come out on top is still very unclear. But certainly the concept of now banks and as you said, the financial well-being is growing. So from an industry landscape perspective, it's something that I'm interested in continuing to keep an eye on as it only becomes bigger over the next few years. So, Ren, before we move on to the future outlook, we will just hear a quick word from our sponsors. So Ren, we've touched on company summary, as well as industry context and some of the major competitors, we're now going to be looking at the future and what the outlook holds for DDO. We are lucky enough to be interviewing the CEO and founder, Andy of DOE. So there should be an episode in your fate now with our conversation with him. So in terms of what is next for DOE with the company plans to expand into small and medium enterprise banking over time, which makes sense. You would think, though, if it is moving into the banking space, it's going to come under a much more sort of regulation. Small to medium enterprise banking for those that are unaware is the funding of small businesses and does represent a major function of the general finance market. You can imagine all the small businesses out there looking for funding and it's certainly a growing market. So it sounds like they are looking to expand vertically into different markets. It plans to spend heavily on marketing its products and services through online marketing, you know, the classic Facebook and Google, etc.. So we can dig into a little bit more of this with Andy as we chat to him. [00:13:04][114.6]

Alec Renehan: [00:13:05] My main takeaway is that its future plans are a little bit opaque, given their more immediate plans are, you know, sort of still in the works. So like the two big things, I think, and when we're talking about future plans are, one, to grow the US user ship and then to to launch in Australia in 2021. [00:13:23][18.1]

Bryce Leske: [00:13:24] That's the main one. [00:13:24][0.5]

Alec Renehan: [00:13:24] They are currently expanding the range of products and services. So we're recording this at the end of November. And we've just seen Dollars announce that they're going to start offering buy now, pay later services in the states. They're going to pot again. This comes back to the partnership thing. They're not going to offer that themselves and where the credit risk themselves, they're going to partner with an existing by now pay later player. Currently, the name is undisclosed. I would hazard a guess that by the time people are listening to this, the name will be known. But yeah, they're those rising, I think. Ten million dollars of capital, two and a half million of that is coming from the buy. Now highlight a player to offer by now Piloto services. So another by now pay later competitor. We've just touched on Zipp in the last episode of Landgrab. We were hoping that that would be the only buy now pay like the stock that we're talking about. But it seems the dough is also moving into that space, but again, through the partnership model. So I think really when we think about the future plans, it really will be about expanding to new markets and leveraging the technology that they've developed into different sort of financial verticals. [00:14:29][64.6]

Bryce Leske: [00:14:30] Very much watch this space. [00:14:31][0.9]

Alec Renehan: [00:14:32] Yeah. And, you know, they've touched on ways that they're going to diversify their revenue streams through things like foreign exchange. I think that's been mentioned of cryptocurrency. They've been talking about a monthly subscription for their app affiliate commission. So obviously when they partner with those banks, there are revenue share agreements or affiliate agreements as they drive people to, you know, these different products and services. So really, the business model is capture as many users as possible through this technology that they've developed and then find ways to leverage that user base and monetize that user base in a variety of different ways. [00:15:08][36.6]

Bryce Leske: [00:15:09] Yeah, seems like the way a lot of these businesses are going at the moment. So Ren, it is fresh. It's a growing business, but it is not profitable. [00:15:17][8.5]

Alec Renehan: [00:15:18] No, we've said the biggest learning from last year's summer series was we only want to talk about profitable businesses. Unfortunately, we started off with two unprofitable businesses, but we will be getting to the profitable end of the ASX boards sooner rather than later, hopefully. [00:15:32][14.0]

Bryce Leske: [00:15:33] Yes. I mean, these growth companies are certainly of interest to the Equity Mates community. Yeah, yeah. [00:15:39][6.4]

Alec Renehan: [00:15:41] what equity mates community love companies that don't make money. Let's talk about PepsiCo and Coles next. [00:15:46][5.5]

Bryce Leske: [00:15:48] Coles boring. [00:15:48][0.1]

Alec Renehan: [00:15:49] Boring. No, I look, they are an exciting company. And obviously the way they hit the boards and the way that they've grown in the first few months has been pretty incredible. But yeah, not profitable at the moment. [00:16:00][10.9]

Bryce Leske: [00:16:00] Do you want to cover all of the financials of dough? They're not making a huge amount of cash. [00:16:05][4.4]

Alec Renehan: [00:16:05] No. So they've obviously just hit the ASX. So their numbers are pretty fresh, but their revenue was about seventy thousand dollars. [00:16:13][7.8]

Bryce Leske: [00:16:14] Seventy thousand dollars. [00:16:14][0.8]

Alec Renehan: [00:16:15] Yeah. Okay. Their expenses were scratch over a million and so they lost nine hundred and sixty thousand dollars in the last year. Okay. [00:16:22][7.5]

Bryce Leske: [00:16:23] So room for improvement. [00:16:24][1.3]

Alec Renehan: [00:16:26] A lot of growth opportunities. Definitely room for improvement. It just it feels like and this is, this is a this [00:16:32][5.6]

Bryce Leske: [00:16:32] is the domestic operation. [00:16:33][1.0]

Alec Renehan: [00:16:34] They don't have a domestic operation. [00:16:34][0.8]

Bryce Leske: [00:16:35] So this is overseas? [00:16:36][0.7]

Alec Renehan: [00:16:36] Yeah. So this is the thing though. It was founded in twenty sixteen and it's just one of those things for me where obviously the decision to IPO at a certain point in a company's life is a decision that different companies and different founders and different venture capitalists and investors approached differently. This feels like a. Very early IPO, and it's almost like this company is its IPO as like a series of events around us. Yeah, and there's probably a number of reasons why you do that. The fact that the stock has popped so much means that the market isn't unhappy, that it's done that. But, yeah, like 70 grand, like that's a salary. [00:17:13][36.2]

Bryce Leske: [00:17:14] Anyway, look, we can ask Andy about it when we speak to him. [00:17:17][2.5]

Alec Renehan: [00:17:17] Chase, hopefully, don't listen to him. [00:17:19][2.1]

Bryce Leske: [00:17:20] Get his views on it all. But it's certainly a very, very young company in the whole lifecycle of a business. So if you had been lucky enough to invest pre-IPO, then you would have been doing very well. But if you look at how it's been trading recently, it's been sort of trading sideways. It is in a trading halt at the time of recording, obviously pending the announcement for this Spinout Piloto partnership. So it'll be interesting to see how the share price reacts from that. [00:17:46][25.8]

Alec Renehan: [00:17:46] But, yeah, I mean, for me, it's one of those things where once the company develops the app and if it does have some IV or, you know, some technology that is proprietary and differentiated and special, then all of a sudden it has an incredibly powerful competitive advantage that will attract users if it can offer a better product or service. In theory, the unit economics become quite good once they've developed the technology because that technology is built and then they're just bringing on more users and they're earning ongoing revenue splits and affiliate fees from the services that they're connecting their users with. And so in theory, these technology businesses have very high start up costs. They're very capital intensive in the beginning. But over time, as they develop their technology and they can start onboarding users that are serious. Right. They enter like a period of, you know, like hyper growth. And then their profit sort of comes from that. And every incremental user, there's not an incremental cost that they're incurred because it's technology. And, you know, there's zero cost to scale or zero cost to scale. And so profit can come quite quickly. The real operative question there is, will they be able to develop a product that is sufficiently better and sufficiently differentiated from what the other Nayo banks can develop, what other technology apps and platforms can develop and what the big, big banks can develop. So that's if you're analyzing that company. And I mean, look, I don't even think we bother with trying to do a valuation on this company, given its current where it is financially agreed. Your analysis here in terms of do I invest or do I not invest is more as a venture capitalist than a, you know, public market investor. You're not forecasting future cash flow and trying to discount that back and say, what's this company worth today based on what we expect it to earn in the future? Because there's just so much uncertainty. It's more like a venture capital analysis. Where is this founding team, the right team? Do they have the right technology expertize in place in that team to develop a product that is really good? And, you know, what's the market opportunity if they are able to execute on this vision? And, you know, this is something where we should ask Paul Wilson how he would analyze this technology company, but it may even be too early for you [00:20:13][147.2]

Bryce Leske: [00:20:14] to think so. Nice Ren. Well, as I said, we are lucky enough to have the opportunity to speak with the founder and CEO, Andy. So keep an eye out for that interview. It should be in your feed now, but otherwise, Ren is always great to chat. The stock's a massive thank you to Equity Mates community member for helping with the research and analysis on this one. Often hard to do with a company that has just gone public. So thank you for that. And also a big thanks to the sponsors for this series superhero. They are offering five dollar brokerage Chiba's broker in town at the moment and free brokerage on all ETFs. So a pretty fantastic offer. Head across to superhero.com today. You to sign up and Ren looking forward to the next episode. [00:20:56][41.4]

Alec Renehan: [00:20:56] Sounds good. [00:20:56][0.0]

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