HyreCar: Gross Profit Margin Of 49% And Undervalued At 2.6x Sales

Summary

• HyreCar runs a web-based marketplace that facilitates car sharing. The company’s platform helps owners rent their cars to Uber and Lyft.
• In the nine months ended September 30, 2018, revenues were equal to $6.67 million, 240% more than that in the nine months ended September 30, 2017.
• The company expects a gross profit increase of 1,500% y/y and revenue growth of 209% for the fiscal year 2018.
• It is also quite beneficial that the company is working on operating efficiencies and expects to obtain positive CFO by mid-2019.
• The shares seem undervalued at 2.6x forward sales. Avis and Hertz, which compete with HyreCar, are trading at 0.9x-1.8x sales and are reporting revenue growth below 10%.

With an interesting car sharing business model, HyreCar (HYRE) recently surprised the market by releasing revenue growth of 209% and gross profit margin of 49%. Growth investors should study this name closely as the numbers to be released in 2019 are expected to be much better than those in 2017. Value investors should also appreciate this name, as efforts are being made to report positive CFO by mid-2019. Finally, HyreCar seems undervalued at 2.6x sales, as there are peers that are trading at 1.8x with revenue growth below 10%.

Business

Incorporated on November 24, 2014, and headquartered in Los Angeles, California, HyreCar runs a web-based marketplace that facilitates car sharing. The company’s platform helps owners rent their cars to Uber (UBER) and Lyft (LYFT). HyreCar presents its business with the image below on its website:

(Source: Company Website)

The business seems very interesting for both drivers and car owners. According to HyreCar, drivers are making on the average $1,000 per week and owners can earn about $14,000 per year. The image below provides further details on these matters:

(Source: Company Website)

While obtaining insurance for all drivers seems quite complicated, HyreCar notes that car drivers don’t need to worry. The company provides insurance for them. In addition, the company says that finding cars, making transactions and managing private information is very easy. The lines below were taken from the HyreCar website:

(Source: Company Website)

The platform seems quite intuitive. Users can select cars and drivers using a map, sort cars by price, and get location, among other options. Investors should perform further due diligence by registering on the company’s website. Additionally, drivers and car owners can exchange messages. The image below provides further details on this matter:

(Source: Company Website)

It is also quite interesting that car drivers and owners can review previous experiences of users. Each user obtains ratings from other users. In addition, there are different pricing options. Users receive different prices depending on the number of days they rent cars. Further details are provided in the image below:

(Source: Company Website)

As shown on the company’s platform, the amount of transaction fees that HyreCar makes is not small. It is equal to 10% fee. The image below provides further details on this matter:

(Source: Company Website)

The Share Price Expected Before The IPO

After assessing the IPO of HyreCar, Bilbao Asset Management believed that $6 per share was quite expensive. A ratio of 3.9x revenues seemed too elevated as compared to that of other competitors like Hertz (HTZ) or Avis (CAR). The lines below provide further details on this matter:

(Source: Seeking Alpha)

After the IPO, the share price dynamics did not cross the $5 mark, as investors did not want to acquire shares at very overvalued levels. The image below shows the stock price chart in 2018 and 2019:

(Source: Seeking Alpha)

Very recently, HyreCar released preliminary unaudited financial results for the full year ending December 31, 2018, that changed everything. Assessing its valuation once again seems necessary. Keep in mind the following feature for now: the company expects a gross profit increase of 1,500% y/y and revenue growth of 209% for the fiscal year 2018.

Balance Sheet And Equity Structure

The last financial statements released are for the quarter ended September 30, 2018. With an asset/liability ratio of 7.3x, the company’s financial situation seems stable. In addition, the amount of liquidity is large with $8.6 million in cash, 94% of the total amount of assets. The image below provides further details on this matter:

(Source: Company Prospectus)

Investors should not fear the total amount of liabilities, as they are below the total amount of cash. In addition, it is quite beneficial that the financial debt is non-existent, and total liabilities declined by 45% as compared to those in December 2017. The image below provides further details on this matter:

(Source: Company Prospectus)

It is also quite beneficial that the company does not seem to have contractual obligations. The lines below were taken from the prospectus:

“We do not have any contractual obligations for ongoing capital expenditures at this time.”

- Source: Company Prospectus

The equity structure seems very simple, which investors will appreciate. After the IPO, HyreCar eliminated its preferred stock. The image below provides the equity structure:

(Source: Company Prospectus)

Impressive Revenue Growth And Gross Profit Margin

The revenue growth in 2018 has been quite impressive. In the nine months ended September 30, 2018, revenues were equal to $6.67 million, 240% more than that in the nine months ended September 30, 2017. The gross profit was also large. It amounted to $2.9 million, 1,218% more than that in the nine months ended September 30, 2017. While net losses increased to -$8.59 million in the nine months ended September 30, 2018, growth investors will not really care about them. Just revenue growth and gross profit margin matter here. If the company continues to deliver these growth figures, shareholders should benefit. The image below provides further details on this matter:

(Source: Company Prospectus)

The New Revenue Numbers And Valuation

The company expects to have revenues of $10 million for the year ended December 31, 2018. This amount of revenues would mean an increase of 209% y/y, which is massive. In addition, the gross profit margin is expected to be equal to 49%. Taking into account that this figure was equal to 10% in 2017, the new figures improve the financial performance of HyreCar quite a bit. The image below provides further details on this matter:

(Source: Press Release)

(Source: Press Release)

With 11.7 million shares outstanding at $4.26, the market capitalization equals $49 million. Deducting $8.6 million in cash, the enterprise value equals $40 million. Assuming forward revenues of $15 million, the EV/Sales ratio equals 2.6x, which seems very cheap. We are talking about a company growing revenues at 209% and having gross profit margin of 49%. Avis and Hertz are trading at about 0.9x-1.8x sales, but they have less revenue growth than that of HyreCar. The revenue growth of peers is below 10%. With this in mind, HyreCar seems undervalued at 2.6x. The company should be trading much higher than that. Investors should accept paying more than 2.6x, perhaps 4x-5x. The image below provides further details on this matter:

(Source: YCharts)

(Source: YCharts)

The Company Is Working On Operating Efficiencies

It is also quite beneficial that the company is working on operating efficiencies and expects to obtain positive CFO by mid-2019. This feature will interest a lot of value investors. The lines below provide further details on this matter:

“We are also realizing increased operating efficiencies as we scale, as shown by Gross Profit growing to $1.9 million. Now, with almost a year’s worth of growth capital currently in the bank, we are well positioned to reach our stated goal of positive operating cash flow by mid-2019.”

Source: Press Release

The amount of efforts to be executed is not small. The company reported CFO of -$4.7 million in the nine months ended September 30, 2018. With this in mind, if the company reports positive CFO in 2019, the market reaction could be significant. The image below provides details on the cash flow statement reported in 2018:

(Source: 10-Q)

Conclusion And Risks

With an interesting business model that reports revenue growth of 209% and gross profit margin of 49%, HyreCar should draw the attention of growth investors. In addition, value investors should also study the company’s financial statements. HyreCar seems to be making efforts to report positive CFO by mid-2019, which should please those making DCF models.

The shares seem undervalued at 2.6x forward sales. Avis and Hertz, which compete with HyreCar, are trading at 0.9x-1.8x sales and are reporting revenue growth below 10%. With these figures in mind, investors should accept that the company should trade at more than 2.6x.

The valuation made in this article uses financial statements that were not audited. HyreCar expects to release its annual report with annual figures in March 2019. It is not likely, but the company may provide different numbers. In this particular case, the market could react very negatively.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.