ACV Auctions Inc

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

ACV Auctions Inc. operates a digital marketplace for buying and selling used vehicles with transparency and comprehensive data that is primarily in North America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ACV Auctions (ACVA) is a technology company operating a digital marketplace for wholesale auto auctions, focusing on a data-driven approach to pricing and selling used vehicles. It’s attempting to disrupt an older, more fragmented industry.

Business Explanation

ACV Auctions operates a digital, business-to-business marketplace for used car auctions, primarily in the United States, Canada, and France. The business model centers around providing a platform that connects car dealers and other automotive resellers with a variety of tools for appraisal, bidding, and transaction management.

The Company makes money by charging a transaction fee for every car that gets sold through its platform. They do not take on the responsibility of ownership, logistics, or transportation of vehicles. Their goal is to create liquidity by ensuring a seamless sale between buyers and sellers.

  • Marketplace Services: This is the core business, where ACV provides a digital platform for wholesale vehicle auctions. The platform generates revenue through transaction fees charged to both buyers and sellers. A majority of sales comes from Marketplace segment.
  • Data and Analytics: The company also leverages the data it collects from its marketplace activity to offer data-driven products and services. This includes providing vehicle valuation data, market insights, and other forms of analytical tools.
  • Transportation and Finance: These segments are provided to streamline transactions on its platform. Transportation services include pickup and delivery while finance services includes payment solutions to its customers.

ACV benefits from having data and a marketplace that enables quick decisions.

Industry Trends and Competitive Landscape

The automotive wholesale industry is currently undergoing a significant transformation, driven by the shift towards digital and online transactions. ACV is at the forefront of this trend, and their platform is being used by independent dealers, large chains, and OEM’s. Some key trends in the industry include:

  • Digitization: Shift from physical auctions to online marketplaces. This trend is likely to be the key for the future as the old fragmented auto market becomes more efficient.
  • Data-Driven Decisions: The importance of comprehensive vehicle data and analytics for determining fair market value.
  • Speed and Efficiency: The need for faster and more seamless transaction processes.
  • Transparency The desire for increased openness and insight into the actual condition and history of used vehicles.

ACV faces competition from traditional physical auction houses like Manheim and ADESA, as well as other emerging digital platforms such as OPENLANE and TradeRev. However, the used car industry is enormous, so there is still a lot of market to capture.

Financials Analysis

A look into the most recent financial reports show a mixed performance for ACV:

Revenues:

  • ACV’s financial performance is still very volatile. The revenue growth is still in the double-digits, showing that the company continues to increase its market share.
  • Recent revenues are still driven by the marketplace revenue, not by ancillary services.
  • Customer insurance revenue and other revenue streams have consistently remained lower than the marketplace revenue.
  • The average wholesale transaction value in the market remains elevated as supply chain problems, though, they are expected to come down over the years. This will have an impact on margins as discussed below.
  • For the year ended December 31, 2022, the Marketplace and service revenue was $354.1 million compared to $218.7 in 2021, a 62% YoY growth.

Profitability

  • The company is currently unprofitable, and continues to burn cash.
  • The marketplace gross profit increased to $185.7 million in 2022 (from $111.6 in 2021), driven by revenue growth, but it could not compensate for the rise in costs. The marketplace cost of revenue was increased due to additional service related expenses, and other third party transportation expenses.
  • The adjusted EBITDA margin for 2022 was -12% vs -21% in 2021. Thus, the company has improved the losses of the business in 2022. The adjusted EBITDA of 2022 was -$145.8 million, compared to -$134.4 million in 2021. This is a clear area that needs improvement.
  • The non-GAAP net loss per share has improved as well, as the company is becoming a bit more efficient.
  • Operating costs are extremely high. The operations and technology, selling, general and administrative, and depreciation and amortization all consume a huge amount of the company’s revenue.

Balance Sheet

  • ACV is still in the growth phase and its balance sheet might not reflect maturity of the business.
  • The company’s equity is relatively low compared to its asset base.
  • Total assets on September 30, 2024 are $1.01 billion.
  • Total liabilities are $549.6 million.
  • Total shareholders’ equity was $456.2 million.
  • The company has $413 million in cash, cash equivalents and short-term investments and $340 million in borrowings.
  • ACV has an ok amount of cash on the balance sheet, but its huge operating losses and its debt obligations could pose risks if its performance is not improved.

Moat Rating: 2/5

ACV Auctions does have several characteristics that are important for the building of a moat but still has a long way to go to build a strong competitive advantage. Here’s a detailed analysis of ACV’s moat strength:

  • Network Effects: ACV benefits from a network effect where more buyers attract more sellers and vice versa. As it continues to scale the platform, it’s going to be extremely hard for competitors to dislodge ACV because of this very factor. The company is trying to be the go to platform for auto auctions. Therefore, the network effect could make ACV have a wide moat. However, this network effect is currently weak because the company has not attained significant market share. Therefore, we are giving it a narrow moat based on the network effect.
  • Switching Costs: Switching costs, while not insurmountable, are also present. As buyers and sellers become accustomed to the ACV platform, including its specific data and processes, it’s likely to be challenging for them to switch to a competing platform. It could take a lot of time, effort, and potential cost for users to make the transition. However, if another platform comes along that is far better than ACV’s, users might easily switch. Thus, switching costs are weak for ACV.
  • Intangible Assets: The company relies partly on its brand name and its data platform to keep its edge over other competitors, it is yet to be seen that the brand name carries significant strength. The data has value but can be copied.
  • Economies of Scale: ACV, as a digital marketplace, does have economies of scale as its technology can be applied to an unlimited amount of transactions without a significant increase in costs. This will provide a good moat if it can reach that scale. Currently, the company does not have the scale to create this advantage.

Considering the above, ACV does not currently have a strong and durable moat because the company faces intense competition, its business is relatively new and needs to be scaled more, and does not generate consistent positive returns on capital. The company does have promising structural characteristics that can lead to the creation of a moat, and it’s actively working on building a network effect, brand, and some switching costs. Thus, the company has a narrow moat, currently. We rate its moat at 2 / 5.

Risks to Moat & Business Resilience

  • Competition: ACV faces intense competition from large, established players in the auto auction industry. This creates pressure on market share, prices, margins, and can potentially impact future growth.
  • Technological Disruption: As a technology company, ACV faces a risk of a new, disruptive technology that can make their platform obsolete. Continuous investment in technology is essential.
  • Macroeconomic Factors: Economic downturns may lead to a decline in used-car sales and price declines. Higher interest rates might make financing difficult and might slow down demand for cars.
  • Lack of profitability: The company is currently unprofitable, and has not created a scalable business model yet. If the company’s costs continue to outgrow its revenues, it may face liquidity problems in the future.
  • Integration challenges: Any company that is formed through a lot of M&A transactions is often associated with many integration related challenges, and ACV will be no exception.

Despite these risks, ACV also has strong capabilities such as its data platform and the network effect that it has been creating which give some resilience. However, the company also has not proven itself and can still face problems in the future.

Understandability Rating: 2/5

ACV’s business model isn’t hard to understand, but its various moving pieces and industry complexities make it difficult to assess. It is relatively easy to understand the marketplace business, that connects car buyers and sellers, but its data analytics and other peripheral businesses are more obscure. Moreover, it is still hard to understand its competitive landscape. It requires a detailed analysis to understand where ACV fits in the bigger picture. Considering the above, ACV gets a rating of 2/5 in understandability.

Balance Sheet Health Rating: 3/5

ACV’s balance sheet is far from perfect. On one hand, the company has been able to raise adequate capital, but it has an enormous debt that will start maturing soon. Its cash reserves give it enough flexibility to operate, but at the same time, the company should focus on becoming profitable so it does not have to rely on outside funding. Overall, the company’s balance sheet is not in the best shape but can be managed for now, therefore we rate the balance sheet at 3 / 5.

Recent Concerns and Management Response

ACV has faced several headwinds in recent times, which includes a decline in revenue growth rates, and a delay in profitability. The management is aware of the challenges that the industry is facing, including higher costs and falling prices in the used car industry.

  • Management has indicated they’re focusing on expense management while also investing in new products and technology to improve efficiency and attract more customers.
  • They have focused on their existing platform and are still aggressively trying to take a majority of market share, therefore profitability will take some more time.
  • Management emphasized that their company would generate strong cash flows when the market recovers.
  • The management mentioned that they have been investing heavily to build its marketplace and tech infrastructure that can potentially support higher revenues and a strong bottom line in the future.
  • The new guidance by management is to reach breakeven adjusted EBITDA during 2024, with positive cash flows in the future.

Overall, ACV is a high growth company which operates in an evolving industry, and management is focused on creating a business that will take the lions share of this industry. The management is aware of the challenges, and is doing its best to improve the metrics of the company.