Morningstar has initiated coverage of leading donations, community engagement and facilities management faithtech Pushpay with a narrow economic moat and a three-star rating.

Analysts say the company, which targets medium to large Evangelical churches in the United States, has carved out a leadership position by helping subscribers increase donations and improve productivity.

"This is music to the ears for many large churches who need constant fundraising, as well as robust software systems to streamline their work," Morningstar equity analyst Shaun Ler says.

Ler says Pushpay (ASX: PPH) has built a narrow economic moat based on switching costs and a sticky customer base, made stronger by the integration of digital donations.

"Prospective departing customer would face material roadblocks," he says. "These include having to assign new services for each critical ministry function, deal with down time, lose donations and member data, or retrain their staff to use a new service.

"These hassles are especially acute to a large church—Pushpay's core customer cohort—where weekly attendances range in the thousands and robust church management is critical."

Ler believes this captive customer base will allow the company deliver predictable earnings growth while boosting operating leverage and returns on capital. He anticipates revenue growth from customer additions, more frequent donations, product cross-sells and modest price hikes.

Company snapshot:

  • Style Box: Mid-growth
  • Morningstar Sector: Technology
  • Listing: ASX, NZX
  • Market Cap: 2,006 M
  • Last Price: $1.74
  • Fair Value $2.10
  • Fair Value Uncertainty: High
  • Economic Moat: Narrow
  • Capital Allocation: Standard

Pushpay is an upmarket software solution for the faith sector. It provides donation and finance tools, a community app and facilities management system. The New Zealand based company, viewed by many as the gold standard in the sector, earns revenue from subscriptions and a clip of donations made through its platform. It primarily targets Evangelical churches in the US but is also used by non-profit organisations and education providers in Canada, Australia and New Zealand.

Ler says the software's power to increase donations and streamline productivity has led to its wide adoption. Today, subscribers number around 11,000, up from 996 in FY2015 and 3,766 in FY2016.

"Apart from saving time on administration, [Churches] can use specific functions to support their ministry work and better engage with members," he says.

"Pushpay's donor app works like social media. Members can network, watch sermons, register for events, set up ongoing donations and more. The purpose is to convert members into recurring donors, and Pushpay excels here."

Pushpay has also recently acquired Resi Media, a video streaming platform that will allow subscribers to stream church services and reach larger communities, particularly during the pandemic.  

Competitive landscape

Pushpay's competitors are small but growing. Ler says years of underinvestment allowed smaller competitors like Tithe.ly (which recently acquired competitor Breeze) and Subsplash to improve their offerings, scale and compete on price.

"Most customers who leave (mainly small to midsize churches) do so as they could find an equivalent offering at lower costs," he says.

However, barriers to entry keep larger non-Church competitors at bay. For example, companies need to pass ESG-screens to ensure they are operating within the ethos of the church. Ler adds that many larger offerings like PayPal or Square are "too generic" and are likely to focus their attention on more lucrative markets like e-commerce and buy now, pay later.

Payments

Risks for investors include the likelihood Pushpay will need to spend big while avoiding price hikes as it expands into new verticals, Ler says. Tailwinds include the rise in digital payments globally and the consolidation of small churches.

"We think Pushpay can win more smaller customers via a low-cost offering; whilst reinvesting in its products to maintain its base of medium to large customers," he says.

"Given its low penetration (5%) in the US religious giving market, this speaks to a large, untapped pool of customers who are yet to embrace technology. This provides room for Pushpay to grow and continue to earn attractive economic profits."

"We forecast processing volumes of US$16.1 billion by fiscal 2026, from US$6.9 billion in fiscal 2021."

Bulls and bears

Bulls say:

  • Pushpay's switching costs are high. Its primary cohort of large customers value functionality and display substantial stickiness, while the costs of replicating Pushpay's products are prohibitive.
  • The firm presently has low penetration in a highly fragmented industry, and has considerable growth runway.
  • Apart from riding the growth of digital payments, investors get the option value from Pushpay potentially establishing a presence in other adjacent markets, such as the non-profit or education sectors.

Bears Say:

  • Pushpay appears to have underinvested in recent years, providing room for smaller competitors to improve their offering and rapidly scale up their businesses.
  • There are risks associated with Pushpay's brownfield expansion (for example, into the Catholic or small church markets). Among these risks are acquisition indigestion, overpayment, or an inability to earn appropriate returns on investment given industry nuances.
  • As an upmarket business selling products at premium prices, Pushpay is at risk of losing relevance if it cannot consistently innovate

Source: Morningstar analysts