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This is an article originally published in Stockhead. 

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

For this edition, we spoke with IML equity funds manager Lucas Goode.

The Australian tradie market is a huge and essential part of the economy, with more than 300,000 workers across various industries such as plumbing, electrical work, construction and landscaping.

Despite its size, the sector has traditionally been slow to embrace digitalisation, with many tradespeople still relying on word of mouth, paper-based advertising and methods like letterbox drops to attract customers.

But in recent years, one company has been quietly reshaping this space: Hipages Group Holdings (ASX:HPG).

The online platform aims to connect tradies with homeowners who need their services, offering a solution to the inefficiencies in how those jobs are traditionally sourced.

According to Lucas Goode, portfolio manager at equities fund manager IML, Hipages represents a solid investment opportunity and he believes the company’s position in the market is likely to drive significant growth in the years ahead.

What makes Hipages so promising, Goode explains, is its ability to tap into the strong network effects that characterise successful marketplace businesses.

The suggestion there is that the company’s network effect has similarities to those that have propelled the success of other online marketplace platforms such as Carsales and REA Group’s real estate portal.

In both the automotive and property sectors, the more buyers and sellers that use the platforms, the more valuable they become for all parties involved.

“We know that these vertical marketplaces, or online classifieds businesses, are very powerful because of the network effects.

“Tradies need to be where the jobs are, and consumers need to be where the tradies are. It’s natural that this is the best place for tradies to advertise.”

Goode says the return on investment for tradies on Hipages is far higher than other forms of advertising.

“You’re getting the best quality leads from homeowners who actually want to hire.”

Despite these advantages, the tradies market is still in the early stages of digital adoption.

Goode points out that penetration in this space remains low, with only about 15% of tradies currently using the Hipages platform.

“They’re still spending money on Google ads, Facebook and other traditional forms of advertising, like fridge magnets and letterbox drops.

“There’s a huge opportunity for Hipages to capture more of this spending.”

He sees a major shift taking place as younger tradespeople enter the workforce.

“The younger tradespeople are very digitally savvy.

“They’re mobile-focused, using apps to manage their work, and they’re eager to adopt tools that can simplify their business operations.”

Hipages is aiming to capitalise on this shift by positioning itself as a one-stop-shop.

A key part of the company’s strategy is its subscription-based model, which provides tradies with access to a set number of leads each month.

Goode believes this model offers a predictable revenue stream for Hipages, while also giving tradies flexibility in how they manage their business.

“It’s a hybrid model,” he explains.

“Tradies buy a subscription that buys them a certain number of leads, and they burn credits depending on the value of the job. The key is balancing what the tradie spends and what they get in return.”

This model is further enhanced by Hipages’ push into software tools for tradies, which he sees as a significant value-add.

“One of the key aspects of the company’s strategy is the recently introduced Tradiecore app, which locks tradies into the platform on a recurring basis.”

Tradiecore offers tools that help tradies manage their schedules, estimate job costs and track job progress. 

Essentially, it’s designed to create a sticky ecosystem that can keep users engaged even when they aren’t actively seeking new work.

“Not only does it generate additional revenue by providing software-type services, but it also helps reduce churn by making tradies more reliant on the platform.”

Goode, however, acknowledges that churn is a risk in this market, due to the transient nature of the workforce.

“Tradespeople don’t necessarily stay in the job for life. They might work in the industry for a few years, then leave, or they might come back after a break.”

Beyond reducing churn, Goode is enthusiastic about Hipages’ ability to scale its business.

In its latest trading update, Hipages showed strong progress in generating free cash flow, a crucial indicator of its long-term sustainability.

“The company has been cash-flow positive, which is a big step forward.

“They’re guiding to free cash flow of $4-6 million this year, which shows the business is maturing and becoming more efficient.”

Hipages’ strong unit economics are another reason for his optimism.

“Online classifieds businesses like Hipages typically have high operating leverage. As revenue grows, it doesn’t require a proportionate increase in costs.

“So, as Hipages continues to scale, we expect significant improvements in profitability.”

Goode also sees further potential for margin expansion, with the company eventually targeting free cash flow margins of 40-50%.

“The underlying economics are very attractive.

“As the business grows and the network effects take hold, there’s a real opportunity for Hipages to generate substantial returns for shareholders.”

While other platforms, such as Airtasker for instance, might be operating in a broadly similar space, Goode believes Hipages’ laser focus on a specific niche – qualified trade services – gives it a competitive edge.

“Airtasker is a very different platform,” he says. “It’s more transactional and ad hoc. Hipages, on the other hand, is building a recurring business with tradies and offering real value to them. This makes it a more attractive proposition in the long run.”

Hipages is also benefiting from the broader trend of increasing reliance on digital platforms for home services.

“People need a reliable way to find tradies, whether it’s for a plumbing issue or a home renovation project.

“In metropolitan areas, Hipages is becoming the go-to platform for homeowners looking for qualified professionals.”

MoneyTalks: IML’s Lucas Goode on why Hipages should trade at ‘a much higher multiple’