I think at this Pushpay Holdings Ltd (ASX: PPH) share price, it make great returns over the long-term.
I'm not saying that if you invest $500 you'll become a millionaire. But I do believe that the Pushpay share price can produce very strong returns for investors due to a number of factors.
A quick overview of Pushpay
Pushpay describes itself as a donor management system, with donor tools, finance tools and a custom community app for the faith sector, non-profit organisations and education providers.
Currently, its biggest client base is large and medium US churches. These churches have large congregations which provide an enormous amount of donations each year. Pushpay is leveraged to this through the digital donations that it processes through its system on behalf of the churches.
Recently Pushpay acquired Church Community Builder which provides a software as a service (SaaS) church management system, largely in the US.
Church Community Builder provides a platform that churches use to connect and communicate with their community members, record member service history, track online giving and perform a range of other administrative functions.
Why I think the Pushpay price share has so much growth potential
The combined Pushpay business can offer clients a stronger combined service to customers. Each business can try to sell to the other's client base. Plus, the combined business can make a compelling offering to potential new clients. That's good news for earnings and the Pushpay share price.
COVID-19 conditions have really accelerated the growth prospects for Pushpay. Social distancing and gathering restrictions led Pushpay to having a stronger FY20 than it first expected. It also helps that Pushpay offers clients a livestreaming service.
In FY20 Pushpay grew its revenue by 32% to US$129.8 million. Not only did Pushpay grow its revenue by a strong amount, its operating leverage also improved substantially. The gross margin rose from 60% to 65% over the year. As a percentage of operating revenue, total operating expenses improved from 65% to 52%.
It's no wonder the Pushpay share price has shot up since reporting.
These are impressive improvement numbers. That improvement means that Pushpay's additional revenue in FY21 will add much more to the bottom line than the revenue added in FY19.
Earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF) rose by US$23.5 million, up from US$1.6 million to US$25.1 million.
In FY21 Pushpay is hoping and expecting to at least double its EBITDAF in FY21 to between US$50 million to US$54 million.
Longer-term growth
The Pushpay share price has doubled so far in 2020. It might be too much to expect that the company can double in size again over the next eight months – but I think it could comfortably beat the overall ASX return.
In FY20 the company generated US$130 million of revenue. Pushpay is aiming for US$1 billion from the medium and large US church sector over time. An extra US$870 million of revenue would turn Pushpay into a much bigger business. Look at how much operating leverage Pushpay was able to generate by adding just US$31 million of extra revenue.
The large and medium US church sector isn't the only growth avenue for Pushpay. There are churches in other countries as well as other religions in the US (and globally).
Plus, Pushpay itself has acknowledged that it services not-for-profits and education – these are also extremely large donation sectors that Pushpay could grow into over time. But that's just a bonus to the current thesis.
Pushpay is now cashflow positive, it generated US$23.5 million of operating cashflow in FY20. This will allow Pushpay, in its own words, to "assess further potential strategic acquisitions that broaden Pushpay's current proposition and add significant value to the current business."
Foolish takeaway
Pushpay is currently trading at under 35x FY22's estimated earnings. I think over the next five years Pushpay could be one of the best-performing small-to-mid cap ASX shares. I believe the Pushpay share price looks very compelling in my opinion. Even after the strong run this year.
