ACVA - ACV Auctions: Wait For The Pullback

2023-09-12 08:00:00 ET

Summary

• ACV Auctions has an impressive track record of consistent share gains in the past three years, and the company is targeting to increase its market share to 12% in 2026.
• But ACVA's current valuations are still unattractive, despite the fact that expectations for the stock have tempered to some extent in recent times.
• I retain my existing Hold rating for ACV Auctions stock, as I expect a better entry point for ACVA to emerge in the event of a pullback.

Elevator Pitch

I have a Hold rating for ACV Auctions Inc. ( ACVA ) shares. The bullish expectations regarding ACVA stock appeared to have tempered a bit in recent months, but ACV Auctions' shares are still much more expensive than its peers. Although ACVA's long-term growth prospects seem promising taking into consideration the company's track record as a market share gainer, investors will do well to be patient and wait for a better entry point. In that respect, I have left my Hold rating for ACVA unchanged.

Tempered Expectations

I noted in my prior update for ACV Auctions written on June 26, 2023 that "the market's expectations of ACVA are elevated." The company's recent share price performance, the revisions to consensus financial forecasts, and the implied upside as per Wall Street's consensus price targets seemed to have proved my point.

As per Seeking Alpha price data, ACV Auctions' shares declined by -2% as compared to a +3% rise for the S&P 500 since my earlier write-up was published. This translates into an underperformance of -500 basis points relative to the broader market in the past two months or so.

In the last three months, twice as many sell-side analysts (6) have lowered their Q3 2023 top line estimate for ACVA as compared to those (three of them) who have revised their third quarter revenue forecasts upwards. This also means that the market consensus expects ACV Auctions' YoY top line expansion for Q3 2023 (+12.0%) to be inferior to what the company delivered in Q3 2022 (+14.8%).

ACV Auctions' mean sell-side analysts' consensus target price was increased from $12.79 at the end of last year to $21.00 as of September 11, 2023, based on S&P Capital IQ data. But the implied share price upside for ACVA has contracted from +55.7% as of December 31, 2022 to +28.4% now. While the average expected rate of return for ACVA's shares is still very decent at +28.4%, the most bearish analyst covering ACV Auctions' shares thinks that the stock is valued by the market at 9% above his or her assessment of fair value ($15).

Market Share Gains

Share gains are the most interesting component of ACV Auctions' long-term growth story.

ACVA's dealer wholesale market share is calculated by multiplying the company's franchise penetration rate by its wallet share with dealers. At Goldman Sachs' ( GS ) Communacopia + Technology Conference on September 6 this year, ACV Auctions shared that it currently boasts a market share in excess of 8% and its target is to get to 12% market share by 2026. If ACVA meets its market share target, the company estimates that its top line could potentially grow by a +33% CAGR between FY 2022 and FY 2026.

ACV Auctions' Share Gains In The Past Three And A Half Years

ACVA has had much success in expanding the company's market share in recent times as indicated in the chart presented above. ACV Auctions highlighted at its Q2 2023 results briefing that the company's unit volume increased by +3% YoY in the recent quarter as compared to a -14% YoY contraction for the dealer wholesale market during the same period.

With my late June article, I noted that ACVA has a "data moat" which can be further widened with the use of Artificial Intelligence, and this is the single most important factor driving market share gains for the company over time. ACV Auctions acknowledged at the Citi ( C ) Global Technology Conference on September 8, 2023 that "collecting data" allows it to "gain more market share" by making "a series of micro optimizations across the funnel over time."

Peer Valuation Analysis

It is apparent that the investors' expectations regarding ACVA have been tempered as I have highlighted in an earlier section of this article. In the preceding section, I highlight that ACVA is a potential investment candidate for the long run considering its market share gain potential.

But ACV Auctions' current valuations suggest there is likely to be a better entry point for ACV Auctions' shares sometime down the road.

ACV Auctions' Peer Valuation Comparison

Source: S&P Capital IQ

The market is currently valuing ACV Auctions at a substantial premium to the company's listed peers as per the peer valuation comparison table presented above.

In my opinion, ACVA becomes more appealing as an investment when its Enterprise Value-to-Revenue multiple compresses to 3 times or below, which is closer to the broader market's Enterprise Value-to-Revenue ratio of around 2.8 times .

Concluding Thoughts

The market has tempered its expectations for ACV Auctions as evidenced by the changes to the sell-side's target prices and financial estimates and ACVA's stock price performance. I have a favorable view of ACV Auctions' market share gain potential, but I still deem ACVA's valuations to be too rich. Therefore, I will only consider upgrading my rating for ACV Auctions in the event of a meaningful pullback which compresses the stock's Enterprise Value-to-Revenue multiple to three times or lower.

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