KAR - ACV Auctions: Good Upside If It Can Hit FY 2026 Target

Summary

• The United States has a sizable and intricate automotive auction market.
• Competition from online players is posing a threat to traditional players.
• ACV Auctions has strong network effects, and its vehicle condition inspector network is a key point of differentiation.

Description

I recommend buying ACV Auctions Inc. (ACVA). ACVA is well-positioned to benefit from the growing trend of online adoption in the automotive industry, as only 17% of independent dealers currently sell wholesale vehicles online. In addition to its marketplace, ACVA differentiates itself through the use of Vehicle Condition Inspectors [VCI] to perform inspections at dealer locations, helping to increase the reliability of the vehicle information provided on the platform.

ACVA's tech-driven solutions and other non-car services also simplify and standardize the customer experience, making it easier for business owners to focus on other aspects of their operations. ACVA also enjoys strong network effects, as more people buying and selling on the platform leads to more options and larger volumes of transactions, generates more data on vehicles and the market, widening ACVA's data and technology moat.

Company overview

ACVA provides a digital marketplace for wholesale vehicle transactions, as well as data services that provide our customers with accurate and transparent vehicle information.

The U.S. automotive industry is large and auction market is complex

Sales of motor vehicles and auto parts in the United States amount to about $1.5 trillion in 2021. The market is segmented into wholesale and retail. The wholesale market relies heavily on traditional auctions, which are responsible for about half of all transactions (based on ACVA S-1).

The wholesale market relies heavily on traditional auctions, which are responsible for about half of all transactions (based on ACVA S-1). Used cars at traditional auctions are bought and sold face-to-face, with sellers transporting their vehicles to off-site locations. After the vehicles are listed with a base price, potential buyers have just minutes to examine the vehicle and place a bid. Even though many classic auctions now feature some form of online bidding (hybrid auctions), these sales mechanisms are still not fully digital and are constrained by the inadequacies and operational challenges of live, in-person auctions. In many ways, the operational inefficiencies of standard physical auctions are replicated in these hybrid auctions that are simulcast online and broadcast for bids. Buyers can't do a thorough inspection of the vehicles they're bidding on, and sellers still have to get them to the auction lot.

Online players are disrupting the market

Despite dealers' growing familiarity with online shopping, the wholesale market for automobiles is just beginning to embrace the convenience of online sales. Only 17% of independent dealers reported selling wholesale vehicles online in the ACVA prospectus. As a result, I believe there is still plenty of room for increase in adoption. These dealers will need adopt the use of digital tools for inventory procurement and management.

In my opinion, online digital marketplaces like ACVA are useful for both commercial consignors and dealers. Since ACVA's digital marketplace seeks to overcome the shortcomings of both classic and hybrid auctions, it should be able to entice dealers and commercial partners who have not previously used auctions for stock management.

ACVA products

ACVA provides its users with detailed and trustworthy vehicle information, as well as a thriving marketplace linking used car buyers and sellers. Underlying this marketplace is ACVA data services, which sheds light on the market value and condition of pre-owned automobiles for commercial partners and dealers, in both on- and off-market. In addition, the platform is bolstered by ACVA's tech-driven solutions and other non-care services that cover the full gamut of the transaction journey. The point is to simplify and standardize the customer experience so that business owners can devote more time to the aspects of their operations that truly matter.

Strong network effects

The scalable digital marketplace and underlying data and technology power the ACVA platform's virtuous cycle. The ACVA marketplace improves as more people use it, because more people buying and selling there means more options for people to choose from. This leads to larger volumes of transactions, which in turn generates more data on vehicles and the market, helping to widen ACVA's data and technology moat. The more information ACVA has about vehicles and the market, the better it can serve its customers and the marketplace as a whole by expanding the number and variety of products it sells. As ACVA expands to provide even more comprehensive and efficient services, their customers can expect a more unified and seamless experience throughout the entirety of their relationship with the company.

Network of vehicle condition inspectors is a key differentiation

By utilizing their preexisting network of vehicle condition inspectors ("VCI"), ACV is able to perform inspections at dealer locations (currently over 800 of them across the country). Compare that to the virtual vehicle inspections conducted by other dealers that use mobile apps, and you'll see that this method is very similar to inspections at in-person auctions. Using ACV's VCIs, sellers can generate standardized condition reports including over 100 data points and visual information, which may increase the vehicle realized values.

I think ACV will be able to set itself apart from competitors further as it continues to use and invest in technologies like the AI-powered Virtual Lift applications and APEX, which records vibration data and an in-depth recording of the engine sound (i.e., APEX is an advanced version of AMP). In my opinion, VCI inspectors can serve as an extension of field sales agents, which will boost client loyalty and share of wallet as they build relationships with clients over time.

Having strong relationships with customers is key for further monetization

Relationships between territory managers, VCIs, and other support staff and dealers and commercial partners boost platform engagement and lead to higher average transactions per rooftop. With a threefold increase from 2016 to 2021, it seems clear that these partnerships are capturing a sizable portion of the dealer market's wallet share.

Moreover, I think ACV's willingness to go above and beyond is a major factor. Unlike traditional auction houses, which either charge extra or ignore vehicles that don't sell the first time around, ACV re-auctions them for free. ACV's inside sales facility also facilitates price negotiations between buyers and sellers following a failed auction, with the company often waiving seller fees to close the deal. In my opinion, the key to auction houses' continued prosperity is an emphasis on providing highly tailored experiences for each buyer, which builds loyalty and, in turn, revenue.

Valuation

I believe ACVA is worth USD $12.97 in FY25, a 62% increase from the current stock price based on my model. This is based the following assumptions: that ACVA will continue to improve its market position in the industry via its innovations and local presence. Over time, I believe ACVA will achieve its FY26 target of $1.3 billion revenue and 25% EBITDA margin ($325 million EBITDA).

In deriving the valuation multiple for ACVA, I looked at KAR Auction (KAR) as a comparable. Given that KAR is larger than ACVA, I believe a discount is warranted here. This discount is an arbitrary figure that also includes my own margin of safety, hence, investors should take note of this.

Key risks

Sensitive to change in used car prices

Although the used-car market is somewhat recession-proof, it is still susceptible to swings in new-car prices. ACVA's bottom line could be hurt if there were to be a sustained trend toward lower retail prices for new or used automobiles. For instance, if wholesale sales of used cars drop, it could be because their retail prices rose relative to those of new cars, making the latter option more appealing to shoppers.

Summary

ACV Auctions Inc. is well-positioned to capitalize on the increasing trend of online adoption in the automotive industry, as only a small percentage of independent dealers currently sell wholesale vehicles online.

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