A small cap growth stock for 2025

We are value investors. That means we get more excited for an opportunity where our downside is protected, than we do for a ‘risky’ potential multi-bagger.

It’s rare that you see both qualities in one situation, a stock where your downside is supported by substantial free cash flows, but a business with the capacity to grow sufficiently to deliver you a 10-bagger outcome, if things go to plan.

But the severity of the small cap bear market that we are now starting to come out of gave us one such opportunity. That company is called Airtasker (ASX: ART).

We have owned ART since early 2024, but as management have executed on the strategy our conviction has grown and we’ve added to our position.

With a highly profitable and cash generative Australian business that funds the early stage but fast-growing UK and US businesses, ART is a situation where you can buy the stock for less than the fair value of the Australian business and get options over the massive UK and US opportunities thrown in for free.

Airtasker – A Marketplace for Tasks

Airtasker is a two-sided marketplace for local services founded in 2012 by current CEO Tim Fung and his business partner Jonathan Lui, and operating in Australia, the UK and the US.

The marketplace is horizontal, meaning virtually any task that a user can think of and that a tasker is willing to complete for a fee, can be posted and completed on the platform. This compares to vertical platforms that tend to focus on one category of services like HiPages (ASX:HPG) for tradie jobs or Freelancer (ASX:FLN) for digital services.

How Does it Work?

Say you want your garden tidied, to move house or for someone to wait in line to buy Taylor Swift tickets for you (yes, this is a real example).

You simply create a profile on Airtasker, describe the task, propose a fee or budget and then post it. This part of the process is free.

The taskers on the platform will submit bids and you’ll pick the tasker you want to complete the job. All communication happens via on-platform messaging and all jobs are insured so long as they stay on platform.

Once completed, you will pay for the task and ART will generate a service fee ranging from 10-20% varying based on how active the tasker is (more activity, lower service fee %, encouraging activity). You post a review, the tasker will do the same for you, and so the marketplace continues.

From the perspective of the user, the platform is easy to use, provides competitive pricing with comparison of options and is self-policing from a quality perspective (the better taskers get better reviews).

Since founding, ART has generated AUD$600m+ in income for taskers. Taskers do not need to pay to view and access jobs, which is different to many other marketplaces.

For taskers, the ART platform varies from a handy second income to a very substantial cashflow generator, an example of which you can see in the interview below:

Airtasker Tasker Interview - The Today Show

ART Business Model

The ART business model is simple, with a few key metrics worth tracking.

Gross marketplace volume (GMV) represents the total dollar value transacting through the platform and is an indicator of marketplace activity.

Revenue is generated at the point where a task is accepted (booking fee), completed (service fee) or cancelled (cancellation fee). The sum of these revenue sources over the GMV for the period is the monetisation rate, which in FY24 was approximately 20%. The other ~80% of GMV is paid to the taskers.

Gross margin is >95%, with cost of goods sold (COGS) comprising only insurance and merchant fees.

Fixed costs are those associated with operations and maintaining the platform. The software is already built and, unlike many tech companies, the annual cost to maintain it is primarily expensed, rather than capitalised.

The key variable cost is marketing spend. We will explain later how ART are using media for equity deals to ramp growth, replicating the successful deal they struck with Channel 7 that helped build the Australian business.

Entering a new region for ART is all about building brand awareness. The platform is the same (a piece of software) and operations can largely be managed out of the head office. So, while the variable marketing spend increases as a new market is entered the fixed costs remain largely flat.

Breaking this down for FY24, the highly profitable ART Australian business generated $31m in free cash flow. That was then used to fund $18.2m in head office infrastructure and software platform costs, for an EBITDA of $12.8m.

That free cash flow from the Australian business is being used to fund the emerging UK and US businesses, with the net free cash flow for the Group (after UK and US investments) of $1.2m in FY24.

The Long Tail, Non-Curated & Critical Mass

There are three important qualities to the ART marketplace (and marketplaces in general) that the investment community may not yet grasp fully, at least with respect to ART.

The first relates to the horizontal nature of the ART marketplace mentioned earlier, and the enormously long tail of potential tasks that can be completed on the platform.

While most tasks do, and probably always will, fall into a common group of categories – home improvement, gardening, administrative tasks – the only restriction for a task on the ART platform is the user’s imagination.

A quick look on the website shows you the breadth of different tasks.

At first glance, and from an investment perspective, you could perceive the above as limiting the addressable market. How large is the total addressable market for “taking my bins out” in South Coogee?

But taken as a whole, that long tail of potential tasks is larger than the most popular categories grouped together. This isn’t our own idea. It’s a concept popularised by Chris Anderson in the early 2000’s as internet companies were becoming more fully understood by investors.

“What’s really amazing about the Long Tail is the sheer size of it. Combine enough non-hits on the Long Tail and you’ve got a market bigger than the hits.”
- Chris Anderson

And it was the founding concept for Amazon, which got started in books as Jeff Bezos recognised there were more items in the book category than in any other category – perfect for an online business. The average Barnes & Noble carried 130,000 different titles, but more than half of Amazon’s book sales came from outside its top 130,000 titles.

It also makes the platform both dynamic and demand driven. In addition to the horizontal nature making any task possible, the level of curation of the marketplace by Airtasker itself is minimal, other than setting the framework of rules within which users and taskers can operate. This is in contrast to most other local marketplaces that are heavily curated.

The benefit to this was seen during COVID lockdowns. Rather than shutdown completely in the face of restrictions, the tasks on the platform simply shifted based on demand. This makes the ART marketplace more resilient than one focused entirely on one category or service, and largely protected from technology change over time.

The same goes for pricing which is set by supply and demand with price discovery occuring through the competitive bidding process and prices being locked in at the point of task acceptance, subject to accepting price variations. Contrast this, for example, to visiting a mechanic and finding out you need a list of very expensive fixes, but without the knowledge (or competitive price discovery) to verify it yourself.

Finally, all marketplaces require a critical mass to be achieved in order for the full economic benefits to flow through. There needs to be sufficient volume and activity on both sides of the marketplace (users and taskers) to provide a quality experience that encourages repeat users.

Getting to that point can be expensive, and is typically localised (e.g. a local services marketplace like ART needs to first hit critical mass in Manchester, before it does so across the UK). ART’s operations in the UK and the US are in these early stage/heavy investment, build-out phases.

But when a marketplace does hit critical mass they are phenomenally valuable, possess powerful barriers to entry and tend to trade well into the double digit earnings multiples as a result.

A marketplace at critical mass with sufficient brand awareness becomes self-sustaining, meaning marketing spend can be pulled back. The graphic below illustrates this experience for the Australian business when they first ramped marketing off the back of the Channel 7 media deal touched on earlier.

You can see how an initial ramp in marketing spend fuelled GMV and revenue until the marketplace became self sustaining, and revenue continued to grow despite marketing being pulled back. This has happened several times in ART’s journey, most recently in FY23/24 when the focus shifted to free cashflow generation.

The ART Australian business has already hit critical mass, is highly profitable, undervalued by the market at current prices and is funding the growth opportunities in the emerging UK and US businesses.

Airtasker Australia – Critical Mass, Cashflows and Undervaluation

The key part of our thesis is that the market is undervaluing, and underappreciating the quality of, ART’s Australian business.

This business generates $200m+ of annual GMV, $40m+ of revenue and $12m+ of EBITDA, after all head office and support costs. As a standalone entity, if we assumed the UK and US operations didn’t exist, ART would be a very profitable company and would likely trade on double digit EBITDA multiples.

Key to understanding the trajectory of the ART Australian business is to look at the brief history of the Company’s listed life.

ART listed in 2021 at 65c/share, during the zero interest rate tech boom, and quickly traded above $1/share. Unsurprisingly, management was investing heavily into marketing and burning cash to do so, and the business was growing very quickly.

Fast forward to 2022/23 and the market had shifted towards demanding free cash flow, dumping any tech stock that refused to do so. Responding to the market, ART made an impressive pivot (not for the first time) to focus on free cash flow.

In simple terms, ART went from spending $20m per annum to just $2m in FY23/24. Yet the top line continued to grow and the Australian business produced substantial free cash.

Having achieved free cash flow, and now with the intention to sustain it, management have stated their objective of reigniting growth in the Australian business.

While the Australian business is already highly profitable, we think there is an enormous opportunity for it to keep growing as brand awareness is built.

HiPages is ART’s largest and most comparable competitor in Australia. HPG operates in the tradie vertical and requires a subscription fee from tradies to receive marketing leads. It’s now building out an end to end software subscription platform – a very different strategic direction to ART.

ART generates substantially more job postings per annum than HPG at 2.5m vs 1.5m. Web traffic data supports this.

Despite this, ART actually generates modestly less revenue than HPG, because of the difference in business model. There is less friction in the process and it doesn’t cost anything to post or bid on a task, whereas HPG’s model is pay for leads.

We think there is substantial opportunity for ART in Australia for home improvement/tradie jobs as a category, alongside HPG, particularly with the recent emphasis on profile verifactions and qualifications. It costs nothing for a tradie to try Airtasker, and for the user there’s greater price discovery.

And of course, ART’s growth is not limited to one job category.

Put simply, marketplaces require a ‘front-of-mind’ presence for their users.

Think of Uber. When you leave the restaurant or bar to head home, you immediately pick up your phone to use the app. The incremental cost to Uber for this is zero, but the cumulative spend to ensure Uber was front of mind when needed was substantial.

In Australia, this same opportunity for tasks still remains largely untapped.

Airtasker UK and US – Free Options on Enormous Opportunities

ART’s Australian business was once a pure start up, and management did an excellent job of building it from nothing to the highly profitable business it is today.

They’re now looking to replicate this success in the UK and US. The key difference here is that the fixed infrastructure is already in place. The platform works. The company has substantial free cashflow to fund growth.

It is a very different proposition to starting from scratch.

One of the key growth levers for the Australian business early in its development was a media for equity deal with Channel 7. Revenue increased 20x over the 5 year deal term.

ART now are emulating that deal structure, but with variances, in Australia, the UK and the US.

In the UK and US, the businesses are currently tracking well ahead of where Australia was at the same point in time based on GMV and app downloads.

While both are coming off a low base, the UK and US grew revenue at 76% and 73% in FY24, and the UK recently accelerated to +100% growth over pcp as the Channel 4 deal has gained traction. This is before the more recent media deals have really started to fire.

The UK and US apps recently peaked at over 10k downloads per week, despite only being live in the market for 60 weeks in the UK and 4 weeks in the US.

It took the Australian business 138 weeks to reach the same milestone.

Media for Equity – Capped Downside, Infinite Upside

One of the things that attracted us to ART was the savvy way in which they’ve structured their marketing spend via media for equity deals in all key regions – Australia, UK and US.

Building a marketplace, especially early on, requires heavy investment to hit critical mass. While ART has the benefit of substantial Australian cashflows, the significant underpricing of the stock means equity capital at the parent is expensive, and so alternative options were pursued.

In total, ART have now signed media deals worth more than $51m over 5 years across digital, out of home, TV and radio.

While we won't go deep into the details of each deal here, there is a simple way to think through the range of outcomes for all of them. Broadly they can be grouped into two categories: convertible note deals and equity deals.

The convertible note deals are easy to grasp. Let’s look at the Australian convertible notes first, using oOH! Media (ASX:OML) as an example.

Announced in June 2024, OML will provide ART with AUD$6m of advertising media (billboards, buses, retail displays) in exchange for a AUD$5m 2-year convertible note at 5.8% interest per annum. At the end of the term ART will repurchase the note in cash or shares (at 10% discount to 30-day VWAP), at ART’s election.

Firstly, the cost of the note is attractive. You’d be hard pressed getting better than 5.8% for a mortgage in the current market. We assume ART management have full confidence in generating a return in excess of the cost of this capital from the associated marketing spend.

In regards to repayment at end of term, if the share price is still undervalued management could choose to repay it in cash. Given there’s $17m+ of net cash on the balance sheet today probably earning around 5%, the lost margin in the meantime (vs 5.8% cost of finance) is immaterial.

And this assumes the worst case, i.e. the marketing hasn’t resulted in a significant increase in gross profit and free cash flow.

If the stock has re-rated substantially ART have the option of issuing equity at a modest (10%) discount.

It’s a good deal for OML too. The marginal cost of selling excess inventory is minimal and they gain a new client at a time when traditional media has found growth hard to come by. They get paid in full, one way or another, at the end of the term.

So, the convertible note deals are easy. The international equity subsidiary deals are a little more interesting.

In Airtasker UK, ART sold a 20% stake to Channel 4 in exchange for GBP£3.5m ($A6.5m) in media advertising. In Airtasker USA, they sold a 17.1% stake to Televisa Univision in exchange for US$4.75m ($A7m) in media advertising.

These are big organisations.

Channel 4 is one of the largest free to air content providers in the UK, reaching 47m people per month. TelevisaUnivision is the no.1 Spanish media company in the US with a daily audience of 100m.

At the end of the deal term, ART will repurchase the relevant equity stakes based on the below valuation formula:

Valuation = ART USA trailing 12 month revenue x Airtasker Ltd (ART) Trailing Twelve Month (TTM) Revenue Multiple

Importantly, ART has the option to repurchase the equity stake in either cash or shares, issued at a 10% discount to the 30-day VWAP at the time.

The above structure derives a performance driven outcome, where both ART and the media partner are aligned and incentivised. It also has offsetting factors to cap the downside for ART, while still retaining full exposure to the upside.

If the international subsidiary is a success, the most value will accrue to ART as the majority owner and operator, and it will likely have driven the share price higher. In this event, ART will repurchase the stake in a non-dilutive manner given it will be valued on the same revenue multiple as the parent, using either cash or shares at their discretion. At a free cash flow level, the repurchase will likely be highly accretive as ART are already bearing the fixed costs of operating the international businesses.

If the international subsidiaries are unsuccessful, then the repurchase valuation is minimal owing to the performance linked valuation formula, effectively capping the downside. ART can then decide to repurchase the stake in either cash or equity, whichever is the least dilutive at the time.

From the media partner’s perspective they are making VC type bets, but with a defined term, a guaranteed repayment and with an outcome at least partly within their influence – an attractive deal for them too.

These media for equity deals are well structured, with offsetting factors to protect downside while still providing exposure to the enormous upside of the international businesses.

Aligned Incentives and a ‘Tell’

ART is a founder-led business, with CEO Tim Fung owning approximately 10.6% of the company. We tend to gravitate to these sorts of stocks, for obvious reasons.

One thing that’s not immediately obvious is that for some time now, Tim has been taking the vast majority of his salary in ART shares rather than cash. This is arguably not great for ART shareholders (issuing of stock at undervalued prices) but it’s a pretty big tell that the key person in the firm views his company as undervalued.

Further, the Long Term Incentives for management are based on the ART share price CAGR over a 3 year period relative to the ASX IT Index:

- If ART share price performance = index CAGR, 25% vest;

- If ART > 2.5% above index CAGR, 50% vest;

- If ART >5% above index CAGR, 100% vest.

Valuation

The most conservative way to approach ART’s valuation is to assume the international businesses are worth zero (highly unlikely) and that all head office and support costs apply to the Australian business (again, unlikely).

Doing this we can take the FY24 Australian revenue of $45.1m and net EBITDA of $12.8m for FY24 and put a multiple on it.

The below outlines recent transaction multiples for similar businesses:

The next table is a list of ART’s publicly listed peer group (some comparables have been normalised by deducting CAPEX from EBITDA):

Based on the above we feel comfortable valuing ART on a trailing EV/EBITDA multiple of 15x. This gets us to a valuation range of 45-50c/share for the Australian business as a stand alone entity.

It should be conservative because the Australian EBITDA figure used assumes no growth and is 1) after a year of minimal marketing investment, with FY25 onwards set to benefit from the deals with ARN and oOH!, and 2) assumes all head office and support costs apply to Australia, when in reality a portion is dedicated to UK and US.

The UK and US businesses are harder to value, but they are certainly not worth zero.

Take for example the implied valuations from the international media deals.

Channel 4 agreed to provide A$6.5m in advertising inventory for a 20% stake in Airtasker UK in June 2023:

- This implies ART’s 80% stake is worth $26m, or 6c/share. The business has grown rapidly since then.

TelevisaUnivision agreed to provide A$7m in advertising inventory in exchange for a 17.1% equity stake in Airtasker USA in September 2024:

- This implies ART’s 82.9% stake is worth $29m, or 6.4c/share.

Using this crude valuation method, we are at 57-62c/share for the group.

Ultimately, the most substantial upside is created if the international businesses really start to fire. To get a feel for the value creation possible we can look at it from an incremental profitability perspective as UK and US grow.

The below assumes the current level of investment into the new markets is maintained. Every dollar of incremental revenue above the current $45m then drops down at 75% margin (comprised of 80% gross profit less 5% for ongoing brand advertising):

The above also highlights the leverage in the model. A doubling of GMV would produce another c.$30m of annual EBITDA, and assuming a stable earnings multiple, a 4-5x return on the stock. Meaningful growth would likely deliver multiple expansion, too.

As we mentioned at the start of this article, we love situations where our downside is largely protected and the upside is uncapped. Predicting exactly how it plays out is impossible, but the range of potential outcomes for our investment in ART looks favourable to us.

Should ART continue to make progress in the UK and US then the market will likely start to price in the enormous respective opportunities in both regions, which are multiples the size of what Australia has already become.

In the meantime don’t underestimate the mature and highly profitable Australian business. After a couple years of restrained marketing, the emphasis on placing Airtasker front of mind for Australian’s should reignite growth, and the favourable economics of the business model should become evident.