Investors Seek a Compelling Plan
Retail automotive has long suffered razor-thin margins at both the manufacturer and dealer level. While cynics describe the sector as an immoveable object to meaningful change, the Covid-pandemic, climate change and other factors may have created an irresistible force.
The way in which customers embrace the broader “mobility” concept is now being impacted by:
Increased focus on eCommerce, digitalisation and the establishment of "omni-channel" marketing,
The introduction of connected, autonomous, subscription and electric technologies ("CASE") and
The expansion of alternative access models (subscription, sharing, etc.) and other developments
Not traditionally enamoured with retail automotive, investors are rewarding those virtual dealers, used-car superstores and lead generation platforms that respond to this evolving marketplace with a compelling plan.
Spotlight on Cazoo – The planned introduction of Cazoo to public markets indicates a stunning valuation of roughly £5 billion for this “virtual” used car dealership. In their recent investor presentation, Cazoo addresses a £500 billion European market that they themselves describe as "ripe for digital disruption".
The tagline to their mission statement promotes:
"We make getting your next car no different to ordering any other product today...where consumers can simply & seamlessly purchase, finance or subscribe to a car entirely online"
While Cazoo doesn't detail how they'll address European markets, they make a compelling case for doing so. This excerpt from, Cazoo's presentation (shown below) clearly identifies the European market as large and digitally under-penetrated.
While industry veterans will recite the difficulty in establishing efficient European operations, Cazoo project their UK presence to rival the size of the largest franchised dealer groups here by 2023.
Investor Response to Contrasting Business Models
How companies respond to the evolving marketplace determines investor appetite. While those with a cogent and compelling plan attract robust valuation, others fall short.
Virtual Superstores - Values touted for Cazoo aren't necessarily out of line with those actually paid for other virtuals (Cazoo states that their 1.5x multiple of projected 2023 revenue is quite competitive). While these listed ventures have yet to earn profit, EV/Revenue multiples all hover around 3.5x with strong growth in a covid-impacted 2020. Closely-held Carzam has recently started trading in the UK and Aures Holdings has announced the pending introduction of their Driverama concept in Europe.
However, in this "start-up" period of extreme growth, market multiples may not be a wholly useful comparison as investors are generally paying now for an enterprise value they believe will manifest in future.
US Dealer Groups – Listed groups in the US attract a rather pedestrian median 0.7x revenue and 13x EBITDA.
These companies traditionally focus on scale expansion to bolster profitability through cost-efficiency and expanded access to manufacturers' volume-based bonus programs. In fact, both Penske and Auto 1 have begun levering European acquisition opportunities.
However, it is the terrestrial used-car superstore model of Carmax that attracts much more lucrative investor attention. At 1.8x and 28x, revenue and EBITDA multiples are effectively double those of franchised neighbours.
European Dealer Groups - Overlooking the well-diversified (and therefore not necessarily comparable) Inchape, Jardine and D'Iterian, franchised dealer networks in Europe attract unimpressive median revenue and EBITDA multiples of 0.2x and 7x respectively. Investors seem so unimpressed with the sector that the largest franchised networks (e.g. Swiss Emil Frey and German AMAG) simply don't bother with public markets.
As in the US, the standout among listed European dealers is Motorpoint's used-car superstore concept. While nowhere near the levels achieved by Carmax, Motorpoint's 0.4x revenue and 15x EBITDA multiples far exceed the franchised networks.
Lead Generation - The strongest performers in retail automotive are not dealers at all. Led by the UK's Autotrader and Norwegian Adevinta (who recently acquired eBay Classified Advertising including Motors.co.uk, Mobile.de and other platforms), the sector demonstrates robust investor attention to all but the weakest (and perhaps a little stale) TrueCar and AutoWeb.
Conclusion - Valuations recently indicated for Cazoo and Cinch attract heated debate. Their business models have been criticised as naive and their management condemned as opportunistic. However, there's no doubt that they and their fellow virtual superstores have impressed investors with a compelling "digital" story.
More traditional franchised models (particularly those in Europe) haven't compelled investor interest as they've yet to promote a cogent strategy responding to the evolving retail automotive marketplace.
Terrestrial used car superstores in the US and Europe attract higher multiples than their franchised neighbours and we should expect to see convergence with the virtual superstore segment of both of their operating models and valuation multiples.
While communication of the story is important, companies in the retail automotive sector will ultimately be rewarded on their ability to execute in response to marketing, technology and mobility-access disruptions.
Like Carvana and others, Cazoo has done the first part in attracting investor interest and should they ultimately achieve their 5-year plan, they may well consider themselves to have been undervalued here in 2021. But, should they fail to produce, investors will consider themselves to have been seriously burned by a seductive story.