RMBL - RumbleON: New Corporate Website May Improve Net FCF Growth

2023-09-04 00:55:48 ET

Summary

• RumbleOn plans to offer new features and a new corporate website in 2023 to improve customer experience and FCF growth.
• In my view, the new corporate website and new features will most likely accelerate transaction closings, which may also have a beneficial impact on net sales growth.
• I would expect that pricing strategies and economies of scale may also enhance future FCF margins.

RumbleON, Inc. ( RMBL ) plans to offer new features and a new corporate website in 2023, which may improve customer experience and FCF growth. Besides, I believe that brand building strategies and direct response channels could also enhance powersports units sold. I do believe that there are certain risks from the total amount of debt, and I dislike the warrants issued recently. With that, I think that RMBL could trade a bit more expensively.

RumbleOn

RumbleOn is a technology-based platform revolutionizing the customer experience in the powersports industry. Headquartered in the Dallas Metroplex, it stands out for being the first and the largest platform of its kind to go public in the country.

Its goal is to make powersports vehicles more accessible to more people across the country. With a wide selection, great value and quality, transparency, and an easy, frictionless transaction, RumbleOn seeks to provide an experience unmatched in the industry. The list of brands offered appears quite overwhelming.

Double Digit Increase In Revenue In Unit Sales, And Positive FCF Expectations For 2024 And 2025

I believe that the recent quarterly results are a good reason to conduct extensive due diligence on the stock. In the three months ended June 30, 2023, the company reported a total of 20k powersports units sold, close to 17.7% more than that in the quarter ended March 31, 2033. Besides, quarterly revenue also increased close to 15% to around $368 million.

I also believe that RumbleOn is appealing because after reporting negative net income for many years, for the first time, analysts expect positive figures in 2024 and 2025. In my view, if management really reports positive EPS and growing FCF, many more investors may have a look at RumbleOn. The demand for the stock may push the price up.

Market analysts expect 2025 net sales to stand at close to $1.801 billion, with 2025 EBITDA of about $97 million, 2025 EBIT worth $68 million, and 2025 net income of about -$6 million. Free cash flow would stand at close to $30 million, which represents significantly more FCF than that in 2024.

Solid Balance Sheet

In the last quarterly report, RumbleOn reported more assets than that in 2022. Cash in hand did not increase, however management reported increases in goodwill, inventory, intangible assets, and right-of-use assets.

As of June 30, 2023, RumbleOn reported cash worth $44 million, restricted cash of about $12 million, and accounts receivable close to $37 million. Besides, with inventory of about $325 million and prepaid expenses and other current assets worth $7 million, total current assets were equal to $452 million. The current ratio is larger than one, so I did not really detect any liquidity problem.

Besides, with property and equipment worth $81 million and right-of-use assets of about $170 million, goodwill stands at $23 million, with intangible assets close to $242 million. Finally, with deferred tax assets worth $64 million, total assets are equal to $1.036 billion, more than 1x the total amount of current assets. I believe that the balance sheet stands in a beneficial position.

The list of liabilities includes accounts payable and other current liabilities worth $84 million, vehicle floor plan note payable of $246 million, and current portion of long-term debt and line of credit worth $18 million. RumbleOn also reported a senior secured note worth $322 million, with convertible debt close to $33 million, operating lease liabilities of about $138 million, and total liabilities worth $854 million.

Considering the total amount of senior secured notes, convertible debt, and lines of credit, I would understand that certain investors are afraid of the total amount of debt. If we assume forward EBITDA of $83 million, the net debt/EBITDA appears larger than 3x. In my view, further reduction in the total amount of debt or FCF growth could lead to improvements in the stock valuation.

FCF Catalyst: Shorter Sales Times, Brand Building Strategies, And Direct Response Channels

With both retail and wholesale sales channels, RumbleOn seeks to maximize profitability through higher sales volume and shorter sales times. In addition, it hopes to increase used vehicle sales using brand building strategies and direct response channels. The main factors that affect used vehicle sales are the quantity sold and the average price. Hence, I would expect that pricing strategies and economies of scale may also enhance future FCF margins.

Impressive Market Opportunity Of Close To $100 Billion

RumbleOn seeks to capitalize on the powersports market, which could, according to estimates of management, be worth close to $100 billion. Considering current net sales and net sales growth, I believe that there is significant room for improvement. In this regard, I would recommend having a look at the lines below from the last annual report.

From our view, powersports includes motorcycles, side-by-sides, ATV, UTV, snowmobile, and personal watercraft along with related parts and components. If you add in the largely unaccounted for but significant peer-to-peer market in used powersports, which RumbleOn believes represents up to 70% of used powersports transactions, the total addressable powersports market is likely in excess of $100 billion. Source: 10-k

Further Inventory Optimization, Data, And New Retail Locations Would Accelerate FCF Growth

In my view, if RumbleOn continues to add new franchises to the list of retail locations, and enough high-quality used vehicles are acquired, we may see further net sales growth. In this regard, it is worth noting that RumbleOn appears to be using data analysis to perform certain tasks, which may bring further efficiency. In the last quarterly report, management noted its efforts with regards to data analysis and its Omnichannel platform.

RumbleOn leverages technology and data to streamline operations, improve profitability, and drive lifetime engagements with our customers by offering a best-in-class customer experience with unmatched Omnichannel capabilities. Our Omnichannel platform offers consumers the fastest, easiest, and most transparent transactions available in powersports. Source: 10-Q

The New Corporate Website For The Year 2023 Will Most Likely Accelerate Transaction Closings

According to management, in 2023, RumbleOn plans to add new features and a new corporate website, which will offer new functionalities to users. In my opinion, if users have better access to the inventory, the number of transactions may increase. As a result, we may see larger net sales growth and FCF growth.

With this goal in mind, we intend to launch our new corporate website under the RumbleOn brand during the first half of 2023 and our all new RideNow-branded website later in the second quarter of 2023. Our RideNow website will have unmatched features for our customers, allowing them to see all inventory in one place and it will have the ability to push inventory to individual dealer websites, resulting in a better online presence and customer experience. Source: 10-Q

Cash Flow Expectations

With the previous assumptions and after considering previous financial figures, my financial model includes 2033 net income close to $49 million, with depreciation and amortization worth $109.55 million, amortization of debt discount of $28.5 million, no forgiveness of ppp loans, and 2033 stock based compensation expense of about $9.55 million. Besides, I also included deferred taxes close to -$151 million, but no originations of loan receivables.

With regards to changes in operating assets and liabilities, I foresee changes in 2033 accounts receivable worth $178 million, 2033 changes in inventory of about -$260 million, and changes in accounts payable and accrued liabilities worth $30 million. Finally, with changes in floor plan trade note borrowings of about $105 million, net cash used in operating activities would stand at close to $147 million. If we also include purchase of property and equipment close to -$6 million, 2033 FCF would be $142 million.

If we assume a terminal EV/ FCF close to 8.55x and cost of capital of 7.055%, the implied NPV of future FCFs would be $706 million. Now, adding cash of about $44 million and restricted cash close to $12 million, and subtracting current portion of long-term debt and line of credit worth $18 million, vehicle floor plan note payable close to $246 million, senior secured note of $322 million, and convertible debt worth $33 million, equity would be $142 million. The implied fair price would stand at about $8.55, and the forecasted internal rate of return would be 3.455%. With this in mind, I think this is a buy for conservative investors. I do not believe the company is a buy if you seek more significant IRR than 4%-5%.

Competition And Competitive Advantages Of RumbleOn

From my point of view, RumbleOn faces competitors that include traditional franchised dealerships, independent used vehicle dealers, online and mobile sales platforms, and private parties.

Competition is focused on providing an exceptional customer experience, ensuring quality inventory, having a wide selection of products, and setting competitive prices. RumbleOn excels by providing a comprehensive platform that allows customers to enjoy a shopping experience online, in store, or through the mobile app. Its friendly buying process and the variety of models available give it an advantage in sourcing and sales.

Risk

In my view, the company has significantly increased its indebtedness as a result of the RideNow and Freedom transactions. This reduces the flexibility to respond to changes in business and economic conditions, resultantly increasing interest expense. High debt levels can also limit the funds available for working capital and other corporate purposes, creating competitive disadvantages.

In addition, the company is exposed to variable interest rate risk on its floor plan payables and other debt instruments, which could negatively affect its profitability. The powersports industry is sensitive to general economic changes and other factors that may affect the demand for products and services, which could have an adverse impact on the company's business and results. Inflation, changes in fuel prices, and interest rates can also influence a company's financial performance. Increases in labor costs and other expenses have also been a concern. I would also understand if certain investors are a bit concerned about the stock warrants issued recently. As a result, I believe that shareholders could suffer equity dilution and stock price declines.

In connection with providing the debt financing for the RideNow Transaction, the Company issued the Warrants at an exercise price of $33.00 per share. The exercise price was adjusted during the third quarter to $31.50 and the expiration date was extended to July 25, 2023. Source: 10-Q

Conclusion

RumbleOn is a company with a strong business model and a strategy focused on providing an exceptional customer experience in the powersports industry. Besides, the new corporate website and extensive use of data could bring further efficiency and FCF margin growth. With that, I do believe that RumbleOn could trade at higher price marks, but there are certain financial risks that could affect future performance, and investors may have to take a careful look at future net debt/EBITDA levels.

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