Pick Shift Over Carvana And Vroom

WY Capital2020-10-21

SummaryShift Technologies, an online used car platform with over 1,000 cars in inventory, recently went public via SPAC.Ecommerce is going to take over 50% of used car sales within a decade, according...

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Initially, I was very skeptical about the unit economics of the market and its long-term viability, and even had a put option position at one point against Carvana (NYSE:CVNA), the leader in the market (which I closed at a profit, thankfully). After the pandemic, however, things have changed. E-commerce has accelerated substantially, and I have warmed up more to growth investing. Revisiting the used auto space, I found that Shift Technologies (NASDAQ:INSU) is likely the most compelling way to play this trend. Note: Ticker has changed to SFT after the merger. About Shift Technologies  Source: WY Capital, Press releases Shift was founded in 2013, born out of the idea that technology could transform the car purchasing experience. In the next 7 years, the company raised 4 rounds of financing privately, grew revenue to $200mil, and in 2020, it finally went public via Insurance Acquisition Corp., a SPAC. Shift mainly operates a used car e-commerce platform in certain states in the US. The company offers over 1,000 different cars on its website, and users can easily use the search functions to find the car they want. After finding the car they want, users can easily purchase the car with a few clicks or schedule a test drive at a convenient time. If they live less than 1 hour away from a Shift dealer, they can get the car delivered to them. Customers can return the car within 7 days or 200 miles.\n  Source: SFT investor presentation Consumers can also sell cars on Shift. By entering basic information in a 3-step process, consumers can get a quote for their vehicle from the comfort of their home. If they decide to consider it, a Shift employee will come to their car and evaluate it, changing the sale price as required. Consumers can get paid store credit or cash for the car. The used car industry The used car industry is twice the size of the new car industry and is the largest vertical in retail, selling around 40mil units per year for a total market size of $840bil. The market is very fragmented, with the top player, CarMax (KMX) only accounting for 2% of the total market despite market leaders in other retail verticals having a far larger market share.  Source: Carvana Analyst Day E-commerce penetration is also very low in this market at just 0.9% in 2018. Despite this, e-commerce is expected to grow drastically over the next decade to make up half of the industry, according to Vroom's (NASDAQ:VRM) prospectus - in dollar amounts, this would be from around $8bil to over $400bil from 2018 to 2030. \n Source: Vroom prospectus COVID-19 has accelerated the shift to e-commerce. According to a pretty famous chart from McKinsey, e-commerce has shown 10 years growth in just 3 months due to COVID-19.  Source: McKinsey Also, according to McKinsey, nearly 70% of young consumers prefer conducting car sales online, and 50% of respondents are willing to pay extra for contactless services, once again showing that the future is e-commerce. The Vroom/Carvana problem With 2 players, Vroom and Carvana, having already completed an IPO, you may be wondering - Why not buy these 2 more established players? Why pick Shift, a smaller player? Well, each of these two companies have their own problems. Carvana doesn't have the best management. Its CEO, Ernie Garcias III, is the son of Ernie Garcias II, someone convicted of bank fraud. In addition, Carvana has a very complex ownership structure that confers substantial power to top management. These factors still make us very wary of CVNA even after its recent rise to $200+ per share. Vroom, meanwhile, has terrible customer reviews. Ratings are frequently less than 50% on many sites like ConsumerAffairs, Yelp, etc. Many customers are complaining about misleading practices and poor customer service. In addition, VRM still has a substantial amount of revenue coming from its traditional dealer business. Why Shift? The points against Carvana and Vroom are positives for Shift. For example, while Carvana has shady management, Shift has top auto companies backing it. As the diagram below shows, Lithia Motors (NYSE:LAD) is a major backer, owning 17% of the total company. \n Source: 8-K With over 180 dealership locations and a $7bil market cap, LAD is a large player in the auto retail space. The fact that it has chosen to partner with Shift and not CVNA or VRM gives substantial credibility to Shift. So far, Shift and LAD have already announced several partnerships, and we expect more to arrive in the future. Shift is also well-loved by consumers, with an NPS far exceeding normal auto retailers and second only to Carvana. Its apps enjoy an incredible 4.8 stars from nearly 3,000 people in total on iOS, which is the highest app rating I've seen among all auto retailers.  Source: SFT investor presentation Shift is differentiated from competitors by listing a greater proportion of older and cheaper cars, as the chart below shows.  Source: SFT investor presentation This isn't necessarily a good thing, as McKinsey estimates that used car sales would shift in the opposite direction, but our belief is that many people will still continue to buy older cars, providing substantial business for Shift.  Source: McKinsey report Shift believes it will be able to grow through 3 main methods. Firstly, as a fairly local retailer, Shift has only covered 12% of the US and is targeting 67% coverage over the next few years. In March, Shift expanded into Washington, making its services available to consumers within the Seattle greater metropolitan area, including Everett, Bellevue, and Tacoma.\n  Source: SFT investor presentation Secondly, Shift plans to expand market penetration in its existing markets. Management uses KMX's 10% penetration in top markets and its own 4.2% penetration in the San Francisco area as a target to shoot for over the next few years.  Source: SFT investor presentation Lastly, management plans to offer additional VAS to existing car buyers like repair services and parts, potentially creating a very profitable stream of additional revenue that could complement used car revenues. In addition to these 3 growth drivers, management believes that M&A and creating a 3rd party marketplace could be further growth drivers, but we believe these will be longer-term initiatives. Valuation The valuation is one of the main reasons why I'm so optimistic about Shift. Despite estimates for over 100% growth over the next few years, Shift is valued at a measly 1.3x 2021E revenues, or around $500mil. The disparity can be seen from the table below:  Source: Admittedly, Shift's execution has been horrible over the past few years - For example, management expected $230mil in revenue in 2019 but only generated $175mil. More recently, however, things have been looking up. Recently, management gave preliminary Q3 revenues of $59mil, which almost exactly matched projections made in July.\n  Source: SFT investor presentation Besides revenue, profitability is another metric to keep track of. Shift believes gross margins should increase from single digits currently to around 20% over the long term, while adjusted EBITDA margins should increase from around -21% currently to around 6-13% long term. This is quite consistent with CVNA's long-term targets.  Source: Q2 CVNA letter I know I've been very critical of CVNA's long-term margin targets, but after the pandemic, I've become much more comfortable with these targets. I believe Shift is sort of like CVNA in 2016, meaning that, after 2-3 years of strong growth, Shift should be able to improve margins to around (6-7%), with further improvements likely afterward. Conclusion Overall, Shift is probably the best way at the moment to play the digitalization of the used auto industry. With LAD backing the company, $300mil in cash to fuel growth, a product widely loved by consumers, and strong growth coming, Shift is poised to achieve market-beating performance over the next few years.\nDisclosure: I am/we are long INSU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.25.1","shortVersion":"4.25.1","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2077539865"}