2023-04-12 13:17:33 ET
Summary
- ACV Auctions Inc. went public in March 2021 in an IPO that priced at $25.00 per share.
- The firm provides a variety of auction software and related services to the used car dealership market in the U.S.
- The industry has gone through a challenging period of limited supply and high price appreciation and ACV Auctions has done well to increase its market share in the process.
- However, the firm has produced continued worsening operating losses combined with the strong potential of slowing consumer credit availability as a result of the recent banking crisis.
- Until we learn the effects of reduced banking lending activity, I'm Neutral (Hold) on ACV Auctions Inc. in the near term.
A Quick Take On ACV Auctions
ACV Auctions Inc. ( ACVA ) went public in March 2021, raising approximately $414 million in gross proceeds in an IPO that priced at $25.00 per share.
The firm operates a digital automobile auction system that also provides related services to U.S. car dealers.
Given ACV Auctions Inc. management’s continued intention to focus on growing its market share through higher spending, the increasing operating loss-generating company and stock may move sideways for the period ahead.
Also, until we learn the effect on consumer credit availability from banking industry reactions in the aftermath of the recent SVB Financial Group (SIVBQ) & Signature Bank (SBNY) failures, I’m Neutral [Hold] on ACVA in the near term.
ACV Overview
Buffalo, New York-based ACV was founded to develop a digital marketplace for car dealers and other commercial car businesses to buy, sell, and value vehicles in the United States.
Management is headed by Chief Executive Officer George Chamoun, who has been with the firm 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
- Go Green
- ACV Transportation
- ACV Market Report
- True360
- Max Digital
- Monk
- Drivably.
The firm seeks clients among independent dealers, franchise dealers and commercial participants of off-lease, off-rental, repossessions and fleets.
ACV Auctions Inc. has over 24,000 dealers and commercial partners in its system and has facilitated hundreds of thousands of wholesale transactions since the company's inception.
ACV’s Market & Competition
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 report estimates "that the number of used vehicles three years old or less will increase from 51 percent of the total in 2017 to about 60 percent in 2022."
However, recent supply chain challenges have impacted the availability of used cars over the past few years, pushing up prices sharply per the following chart, although recent activity has improved:
Major competitive or other industry participants include:
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Manheim
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KAR Auction Services, Inc. ( KAR ).
ACV’s Recent Financial Trends
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Total revenue by quarter has begun falling in recent quarters, likely in concert with falling used car prices and user affordability headwinds:
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Gross profit margin by quarter has varied per the following chart:
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Selling, G&A expenses as a percentage of total revenue by quarter have risen sharply in the most recent reporting period, despite management’s focus on "expense discipline" in recent periods:
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Operating income by quarter has worsened sharply in recent quarters:
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Earnings per share (Diluted) have followed the trajectory shown in the chart below:
(All data in the above charts is GAAP.)
In the past 12 months, ACVA’s stock price has dropped 13.7% vs. that of KAR Auction Services’ drop of 21.4%, as the chart indicates below:
Management did not provide any visibility into the company’s retention rate metrics.
For the balance sheet , the firm finished the quarter with cash, equivalents, marketable securities (including auction float) of $497 million and debt of only $75.5 million.
Over the trailing twelve months, free cash generated was $72.0 million, of which capital expenditures accounted for $3.2 million. The company paid $39.3 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:
Measure [TTM] | Amount |
Enterprise Value / Sales | 3.6 |
Enterprise Value / EBITDA | NM |
Price / Sales | 4.6 |
Revenue Growth Rate | 17.6% |
Net Income Margin | -24.2% |
GAAP EBITDA % | -23.6% |
Market Capitalization | $1,940,000,000 |
Enterprise Value | $1,530,000,000 |
Operating Cash Flow | -$75,180,000 |
Earnings Per Share (Fully Diluted) | -$0.66 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be KAR Auction Services; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | KAR Auction Services | ACV Auctions | Variance |
Enterprise Value / Sales | 2.7 | 3.6 | 33.1% |
Enterprise Value / EBITDA | 17.2 | NM | --% |
Revenue Growth Rate | 4.7% | 17.6% | 271.3% |
Net Income Margin | 15.9% | -24.2% | --% |
Operating Cash Flow | -$455,000,000 | -$75,180,000 | -83.5% |
(Source - Seeking Alpha.)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
ACVA’s most recent GAAP Rule of 40 calculation was negative (6.0%) as of Q4 2022’s results, so the firm has performed poorly in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 17.6% |
GAAP EBITDA % | -23.6% |
Total | -6.0% |
(Source - Seeking Alpha.)
Future Prospects For ACV Auctions
In its last earnings call ( Source - Seeking Alpha ), covering Q4 2022’s results , management highlighted the growth in its market share despite a declining market environment for used cars.
Leadership appears to believe the worst of the industry gyrations is over, seeing "positive signs emerge in the automotive market with industry headwinds beginning to moderate."
The firm will continue to pursue market share growth in 2023; management provided the following chart for its 17% year-over-year market share growth:
Looking ahead, management guided to 2023 full-year revenue growth of 10% at the midpoint of the range and GAAP net loss of $106.5 million at the midpoint.
The company's financial position appears to be solid, with substantial liquidity and low debt.
Regarding valuation, the market is valuing ACVA at an EV/Sales multiple of around 3.6x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:
So, although ACVA isn't a pure SaaS company, by comparison, ACVA is currently valued by the market at a 43% discount to the broader Meritech Capital SaaS Index, at least as of March 30, 2023.
The primary risk to the company’s outlook is a likely macroeconomic slowdown or recession as banks sharply reduce their lending, which may reduce its revenue growth trajectory.
Also, the firm’s worsening operating losses are a concern in a higher cost of capital environment, as the market has generally punished the stocks of such firms.
A potential upside catalyst to the stock could include a pause in interest rate hikes and reduced downward pressure on valuation multiples.
However, consumer credit availability is my biggest concern in the months ahead.
Until we learn the effect on consumer credit availability from banking industry reactions in the aftermath of the recent SVB & Signature bank failures, I’m Neutral [Hold] on ACV Auctions Inc. in the near term.
For further details see:
ACV Auctions Keeps Focus On Market Share Growth In 2023