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Forex Dreamers

Everyone wants to make billions from used cars

How to get rich faster? Someone can make money on NFT, but a huge fortune can be made in such a trivial way as selling used cars.

British startup Cazoo Ltd. started selling used cars online in December 2019. Last year, the company sold just 12,000 vehicles, and its gross profit – the money left over after deducting the cost of buying cars and preparing them for sale – was minus 2%. However, the company last week announced a merger with special-purpose company Ajax I to enter the open market, which is valued at approximately $ 7 billion excluding cash. After the deal, founder and CEO Alex Chesterman will receive 25% of the shares, so on paper he will soon become a billionaire.

While this justifies his decision to list in the US rather than London, it is a staggering figure for such a young company in a competitive industry. Lookers Plc, a traditional British car dealer, is valued at £ 420 million, including net debt.

Cazoo is part of a group of online dealerships that promise to save customers the hassle of buying used cars. They are offered a fixed, transparent price, and the car is delivered right to the door. If customers are unhappy, they can return it back without question – just like they could with a pair of shoes. The advantages of this model were evident last year when traditional dealers had to close showrooms.

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While online car sales are great for consumers, the question is whether these companies will ultimately make profits to justify the inflated estimates.

Investors are now aiming for more, and it basically boils down to the work of one American dealer: Carvana Co. Since March 2020, the company’s value has grown roughly 10 times to $ 43 billion, or more than 30 times the expected gross profit this year.

According to the Bloomberg Billionaire Index, Carvana CEO Ernie Garcia III and his father, Ernie Garcia II, are worth approximately $ 25 billion, despite the company’s losses of $ 1.4 billion since its founding in 2012. Analysts expect it to suffer losses a couple more years.

New opportunities

Companies trying to replicate Carvana’s success in the stock market have free access to capital. Vroom Inc. raised about $ 500 million in an IPO on the Nasdaq last June, and Shift Technologies Inc. completed the merger with SPAC in October. Mexican platform for the sale of used cars Kavak recently raised $ 485 million at a valuation of $ 4 billion. German Auto1 Group SE, whose Autohero brand supports a similar online service, raised 1.8 billion euros in an IPO and is valued at 9.5 billion euros. UK rival Cazoo Cinch is targeting a £ 5bn valuation, according to Sky News.

The opportunities are clear: Big deals like home and car purchases are among the last strongholds of physical sales. Therefore, the used car business remains local and fragmented. While customers can start looking online, they usually visit a dealership anyway or do deals directly with a personal salesperson at some point.

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With high-definition virtual tours and money-back guarantees, they feel more confident when shopping online. According to Bloomberg Intelligence forecasts, online used car sales could grow to 7% of the total by 2025, up from 1% today.

Unified distribution and digital transactions enable these companies to achieve economies of scale and avoid showroom costs. They strive to increase car profits by offering additional services such as financing and insurance. Roughly half of Carvana’s gross profit comes from sales of accounts receivable and vehicle protection plans.

However, unlike classified ads sites such as Auto Trader Group Plc and AutoScout24, this option is not a lightweight asset business model. In addition to the need to purchase large inventories of vehicles, there is often a significant investment in delivery trucks and repair centers.

Companies also spend a lot of money on marketing. Not without advertising gimmicks. Carvana customers can pick up a car from a giant vending machine by inserting a token and the car will descend from a multi-story glass tower. There are 28 such towers in the USA. Cazoo also sponsors two Premier League football teams. All this eats up money.

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In addition, well-known dealers have noticed the potential threat and are investing more in digital opportunities and hybrid business models that operate online and offline.

New Amazon

Unsurprisingly, opinions were divided over these actions. Carvana is a favorite long-term bet for hedge funds that believe it could become the Amazon used car dealer. However, more than a fifth of the free float was borrowed by short sellers.

“Carvana is doing great, margins are growing consistently, but they are not making money,” said Doug Arthur, an analyst at Huber Research Partners. “This is a very capital intensive project and the model has not yet proven its effectiveness.”

Cazoo’s management seems to be doing well as well, but – as with most SPAC deals – its presentation is full of optimistic forecasts, but even they do not suggest a positive cash flow until 2024.

This week, SPAC shares in Ajax fell slightly below the $ 10 level at which they merged with Cazoo. While this reflects in part a broader SPAC stock sell-off, shareholders may buy back their stake in cash rather than fund the deal if the calm continues.

The buyout would cut cash outflows to Cazoo’s existing shareholders, including Chesterman, who is estimated to receive about $ 150 million in secondary proceeds. Considering how much Cazoo and other similar projects still have to prove, the rewards still look generous.

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