ACVA - ACV Auctions Gains Share But Economic Indicators Raise Questions

2023-12-08 15:43:08 ET

Summary

• ACV Auctions Inc. reported better-than-expected Q3 2023 financial results, beating revenue and earnings estimates.
• The company provides an online marketplace and related services for car dealers to buy and sell new and used vehicles.
• ACV Auctions' financial position is strong, but I have concerns about slowing economic activity in the U.S. due to leading economic indicators.
• I'm Neutral [Hold] on ACV Auctions Inc. for the near term.

A Quick Take On ACV Auctions

ACV Auctions Inc. ( ACVA ) reported its Q3 2023 financial results on November 6, 2023, beating revenue and consensus earnings estimates.

The firm provides an online marketplace and related services for car dealers to transact new and used vehicles.

I previously wrote about ACVA with a Hold outlook as it sought market share growth and international expansion.

While a Bullish case can be made for ACV Auctions Inc. if you have a multi-year timeframe, I remain Neutral [Hold] on the stock at its present level due to concerns about slowing economic activity in the U.S.

ACV Auctions Overview And Market

New York-based ACV has created a full-service digital marketplace for car dealers and other commercial car businesses to buy and sell and value vehicles.

The firm is led by CEO George Chamoun, who has been with ACV since 2016 and was previously at Synacor after founding Synacor's predecessor firm, Chek.

The company’s primary offerings include:

• Digital Marketplace

• Data Services

• API Integration

• ACV Capital

• True360

• Monk

• Drivably

• MAX Digital

• ACV Market

• Go Green

• ACV Transportation.

The company targets new clients from independent dealers, franchise dealers and commercial participants of off-lease, off-rental, repossessions and fleets.

ACV has more than 24,000 dealers and commercial partners in its system and has facilitated hundreds of thousands of wholesale transactions since the company's inception.

According to a market research report by McKinsey & Company, the U.S. market for used car sales is significantly larger than that for new cars.

The U.S. used car market also has been more resilient to external economic shocks.

Used vehicles are becoming "younger" in age due to greater "off-lease supply and newer certified pre-owned vehicle" inventories.

However, recent supply chain challenges have impacted the availability of used cars over the past few years, although prices have moderated unevenly in the last 18 months or so:

Major competitive or other industry participants include:

• Manheim

• OPENLANE, Inc. ( KAR ).

ACV Auctions’ Recent Financial Trends

Total revenue by quarter (blue columns) has trended higher; Operating income by quarter (red line) has remained materially negative:

Gross profit margin by quarter (green line) has moved higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended upwards more recently:

Earnings per share (Diluted) have remained substantially negative but have made some progress toward breakeven:

(All data in the above charts is GAAP.)

In the past 12 months, ACVA’s stock price has risen 62.34% vs. that of OPENLANE’s gain of 7.83%, per the chart below:

For balance sheet results, the firm ended the quarter with $450.2 million in cash, equivalents and short-term investments and $105 million in total debt, all of which was categorized as long-term.

Over the trailing twelve months, free cash flow was $6.6 million, during which capital expenditures were $2.1 million. The company paid $49.7 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For ACV

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be OPENLANE:

(Source - Seeking Alpha.)

Commentary On ACV Auctions

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted revenue at the high end of previous guidance due to its ACV Transport and ACV Capital service offerings.

Those two services also contributed to margin expansion during the quarter.

However, gross merchandise value [GMV] was flat at $2.1 billion as a result of reduced wholesale market prices as the U.S. car supply continues to converge on demand after several years of constrained supply relative to demand.

I prepared a chart showing the frequency of various keywords and terms used by management and analysts:

The chart mentions "challenges" frequently, underlining continued supply imbalances and the availability of consumer credit being cross-currents.

Analysts questioned the leadership about unit growth, pricing outlook and time to market normalization.

Management said that unit growth is a result of having a growing number of dealers in its network, and revenue growth is from having a higher wallet share over time.

As to pricing, leadership believes that its 2026 model is "about $500 in combined buy/sell fees" while averaging $450 in 2023.

Leadership is using 2026 as a time frame for a return to market normalization, including supply/demand balance, dealer incentives and pricing rationalization.

For the quarter’s results, total revenue rose by 12.9% year-over-year and gross profit margin increased by 7.8%, an impressive result.

Selling and G&A expenses as a percentage of revenue grew by 1.3%, while operating losses were reduced by 11.6% but remained substantial at $22.2 million for the quarter.

The company's financial position is strong, with substantial liquidity, some long-term debt and a small amount of free cash flow over the trailing twelve-month period.

Looking ahead, management raised revenue guidance for 2023 that suggests growth of 14.1% over 2022.

However, even if this growth rate is achieved, this would represent a decline in revenue growth rate versus 2022’s growth rate of 17.6% over 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has risen by an impressive 88% net, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include continued supply/demand rebalancing and growing contribution from its Transport and Capital service offerings.

Against that potential, the company hasn’t made significant progress on its operating losses, so that’s a concern if the cost of capital remains elevated.

Also, U.S. economic leading indicators continued to fall in October by 0.8% to 103.9, according to The Conference Board’s index .

The index’s history from 2000 to the present period shows the periods of recession in vertical gray areas against the lines of real GDP change (gray line) and the leading economic indicators index (blue line) in the chart below.

So, with leading economic indicators on the downswing, many observers believe 2024 will see further economic weakening as the effects of a higher cost of capital continue to dampen demand.

While a Bullish case can be made for ACVA over a multi-year period, I remain Neutral [Hold] on the stock at its present level.

For further details see: