ACV Auctions Stock: Digitizing the Used Car Wholesale Market
The used car wholesale market is in desperate need of digitization, and one industry is riding up to the challenge.
Here’s how ACV Auctions stock benefited from the growing demand for used cars during COVID — and the digitization of used car wholesaling.
Catch me up: Founded in 2014, ACV Auctions operates a digital marketplace with US dealerships using ACV to buy/sell wholesale used cars.
- ACV Auctions went public in March 2021 but have fallen 26% from its first-day closing price.
- Acquired Max Digital, an automotive inventory management and merchandising platform, for $60m.
ACV is disrupting how car dealerships source used cars, which is a tedious, complicated and outdated process:
- The old way: Dealerships would purchase used cars through in-person auctions or through relationships — with auctions making up an estimated 50% of wholesale transactions.
- The new way: ACV digitizes this process by offering an online marketplace with ACV taking a fee for each purchase.
Since ACV has only been public for a couple months, we only have one set of earnings report but when it comes to ACV’s financials, the company is healthy and growing.
- $660m in cash with nearly zero debt ($7m)
- Expected sales growth of 47-50% for the full year of 2021
- 63.6% revenue growth in the recent quarter — with both earnings and revenue coming in higher than expected.
On top of its auction marketplace, ACV offers additional services to its buyers/sellers that increases the average revenue per user:
- Live appraisal to assess the value of the vehicle
- Transportation services to deliver vehicles between customers
- Financing options on car purchases
ACV Auctions stock opportunity
While there are several companies digitizing direct-to-consumer car sales (i.e. Carvana, Vroom etc), there are few focused on the wholesale part (i.e. How used car dealerships source car inventory).
The largest players — KAR Auctions and Manheim make up 70% of the market and both of them make the majority of their sales through in-person auctions.
ACV is approaching the market with a digital-first approach — which could lead to a better product offering compared to existing players.
What’s the upside? ACV is at the early stages of its growth and has a massive market to expand:
- Large addressable market: In the auto market, there are over 22 million vehicles transacted annually. Having only sold ~400k vehicles in 2020 via its marketplace, ACV has significant room to grow.
- The marketplace effect: ACV benefits as more dealers join its platform — making it easier to find buyers/sellers and gather data to improve the marketplace.
- Digitization opportunity: Only 17% of independent dealers have sold wholesale vehicles online, and 36% have bought online.
With a massive market to grow into and a large portion of the market still offline, ACV has plenty of room to grow.
3 things will drive ACV’s growth: Expanding the number of dealerships on its platform, product expansion and margin improvement.
Why now? While ACV benefited from COVID pushing the used car wholesaling process online, the company had also been negatively impacted by the lack of used car inventory. But despite the issues, the company saw tremendous growth through the past year.
While the rental car market hasn’t recovered yet, we’ve seen signs of inventory easing and price increases slowing. This could bring more inventory back in the market in the coming months — benefiting ACV.
- An early lockup on insider shares ended on May 18 — which may have sent its shares lower as insiders were given able to sell 25% of their shares earlier than the normal lockup expiry date.
At its current price of $23, ACV’s stock is at a much more attractive valuation than its early days of going public, when it traded as high as $37. We’re also seeing strong buying activity from hedge funds in the first quarter of 2021.
What are the risks with ACV Auctions stock?
- Competition: Two competitors — KAR Auctions (NYSE:KAR) and Manheim Auctions — control 70% of the used wholesale car market. Both of these companies have launched digital marketplaces which compete directly with ACV.
- Semiconductor shortage: Cars have been in low supply since COVID affected the semiconductor supply chain — which is a key component in car manufacturing. This led to a shortage of new and used cars — driving up the price of cars. If the shortage prolongs, ACV’s sales can be negatively impacted.
- Digital adoption: While COVID accelerated the adoption of used car wholesaling, some dealerships may prefer to use in-person auctions.
ACV’s success relies on taking market share away from these competitors. And luckily for ACV, KAR Auctions had struggled with declining profits from an acquisition made in 2017 — buying TradeRev, another online used car wholesale marketplace. KAR had early problems integrating TradeRev — which threatened to cannibalize KAR’s offline car sales.
Investors: ACV is an emerging growth company with a current $3.5b market — making it riskier than your traditional blue-chip stock. But at its current valuation and growth prospects, we see an attractive entry point into the company. As the car shortage and used car prices fall from their highs, we believe ACV can benefit as more inventory comes into the market.