ACVA - ACV Auctions: Positives Priced In

2023-03-14 08:02:24 ET

Summary

• The 2023 financial outlook for ACV Auctions is favorable, as the company expects to report significantly narrower losses at the EBITDA level this year.
• But ACVA's shares have already done pretty well since the start of this year, and its upcoming Q1 2023 results release and 2023 Analyst Day might offer negative surprises.
• Positives are priced in for ACVA in my opinion, suggesting that a Hold rating is fair.

Elevator Pitch

I am awarding a Hold investment rating to ACV Auctions Inc.'s ( ACVA ) stock.

ACV Auctions' Q1 2023 EBITDA guidance and reiteration of its 2026 financial goals are key positives which have driven the company's shares up significantly. But positives have been factored into ACVA's valuations, implying that a Hold rating for ACV Auctions is justified.

Company Description

In its media releases , ACVA calls itself a company that provides "digital marketplace and data solutions for sourcing, selling and managing used vehicles."

ACV Auctions' Corporate Milestones

The Various Ways In Which ACVA Makes Money

As indicated in its Q4 2022 results presentation , ACV Auctions earned 56%, 35% and 8% (doesn't add up to 100% because of rounding approximations) of its recent quarterly revenue from Auction & Assurance, Marketplace Services, and SAAS & Data Services, respectively.

Positive Outlook For ACV Auctions

ACV Auctions is expecting that the company's EBITDA loss should narrow from -$56.4 million for fiscal 2022 to -$32.5 million in FY 2023 as per the mid-point of its guidance outlined in its Q4 2022 results release . The Wall Street analysts aren't disagreeing with ACVA's management, considering that the current consensus FY 2023 EBITDA projection for the company is -$32.9 million.

At the company's most recent Q4 2022 investor briefing in late February 2023, ACVA noted that "used vehicle supply has reached levels not seen since the onset of the pandemic" which typically "improves auction conversion rates." Simply put, dealers are more eager to dispose of used vehicles when inventories pile up. A recent March 7, 2023 Seeking Alpha News article also mentioned that "wholesale used-vehicle prices increased 4.3%" in February 2023. This represented the most substantial price increase for the month of February in the past 14 years.

Apart from a more favorable outlook for the used vehicle market as highlighted above, ACV Auctions' operating leverage and expense optimization efforts will allow the company to improve its profitability this year. ACVA has guided that its top line expansion for FY 2023 will be twice that of the growth in its operating costs for the current year. Given the company's goal of registering a +10% (mid-point of guidance) revenue growth in 2023, ACVA is expecting a rather modest mid-single digit percentage increase in its operating costs. This is likely attributable to the high fixed cost nature of ACV Auctions' business operations, and the company's focus on running as lean as possible.

The above mentioned are the key factors supporting expectations of a narrower EBITDA loss for ACV Auctions in the current fiscal year.

ACVA's Recent Stock Price Outperformance And Valuation Re-Rating

Year-to-date in 2023, ACV Auctions' shares have jumped up by +56% , while the broader market (with S&P 500 as a proxy) rose by less than +1% in the same time frame. In fact, ACVA's stock price has gone up by +106% in the last ten and a half months; its last done share price was $12.56 as of March 10, 2023 as compared to its 52-week low of $6.10 registered on June 30, 2022 during intra-day trading.

The consensus forward next twelve months' Enterprise Value-to-Revenue valuation multiple for ACVA has re-rated from 1.82 times as of January 3, 2023 to 3.40 times at the end of the March 10, 2023 trading day as per S&P Capital IQ data. It is also worthy of note that ACV Auctions' current consensus forward next twelve months' Enterprise Value-to-Revenue metric is at a 10-month high.

Potential De-Rating Catalysts For The Company

There are potential two de-rating catalysts for ACV Auctions in the next few months.

Firstly, ACVA is expected to announce the company's financial results for the first quarter of this year on May 11, 2023 after the market closes.

Based on the market's financial projections obtained from S&P Capital IQ , Wall Street currently sees ACV Auctions turning around from a -2.2% YoY top line contraction in Q4 2022 to record a +5.4% revenue growth for Q1 2023. The sell-side analysts also predict that ACVA's loss at the EBITDA level will narrow from -$18.0 million for Q1 2022 to -$13.0 million in Q1 2023.

If economic conditions turn for the worse or interest rates rise faster than expected, it is possible that ACVA's Q1 2023 results and Q2/FY 2023 guidance released in May might disappoint investors.

Secondly, ACV Auctions has scheduled its 2023 Analyst Day for June 1, 2023 , and there might be negative surprises in store.

It has been encouraging that ACVA has stuck to its medium term or 2026 top line ($1.3 billion) and EBITDA ($325 million) goals as per the company's management commentary at the most recent quarterly results call.

But ACV Auctions also emphasized at its Q4 2022 results briefing that the focus of its 2023 Analyst Day will be how its "model has evolved from our Analyst Day last year (2022) in terms of how we hit those (2026) targets." As they say, the devil is in the details. If ACV Auctions' detailed assumptions supporting its FY 2026 financial targets don't satisfy the investment community, there is a risk of a sell-off in ACVA's shares following its 2023 Analyst Day.

Concluding Thoughts

ACV Auctions' recent share price outperformance and valuation multiple expansion have set a high bar for the company's first quarter results announcement and Analyst Day, which leaves room for disappointment. Therefore, I have a cautious view of ACVA, and rate the stock as a Hold.

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