Hyrecar Is In An Enviable Position

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About: HyreCar Inc. (HYRE), Includes: UBER
by: WY Capital
Summary

The Total Addressable Market(TAM) is gigantic and growing fast.

Hyrecar has significantly more demand than supply, according to management.

Margins are expanding and the company's cash burn is slowing, according to Q2 results.

Overall, the rewards seem to outweigh the risks significantly.

Hyrecar(HYRE) has been on our watchlist for some time. Although we usually lean towards value companies, as most of the top growth companies seem to be massively overvalued, Hyrecar seems to be mostly ignored by growth investors, trading at just 3.8x revenues despite strong growth and attractive platform economics. We believe Hyrecar is one of the best growth stocks to own at the moment, and we have added a small position in our portfolio.

Large TAM, little competition

Hyrecar is a platform that serves a small, niche section of the car rental market, allowing drivers to rent cars for the sole purpose of ridesharing or food deliveries.

investor presentation

There are over 3.9mil Uber drivers on the road today and thousands are joining every month. According to management, Hyrecar is receiving 30000 driver leads every month.

The resulting potential is hundreds of thousands of cars available to drivers on our platform, and this commercial opportunity matches our constant ballooning demand from drivers needing cars, which was over 30,000 driver leads last month.

Q2 earnings call

The problem is supply. Hyrecar needs more cars on their platform to match the ballooning driver demand. Although Hyrecar has historically turned to individuals to supply their unused cars, it has now turned to dealers with large fleets of cars.

The TAM on the supply side is gigantic as well, with over 48000 franchise independent dealers in the US.

To put these numbers into context, there are combined 48,000 franchise independent dealers in the United States, so the total addressable market or TAM is tremendous, and we've just started to scratch the surface of this initiative.

Q2 earnings call

Dealers tend to have larger supplies of cars and therefore they can usually undercut individual owners through economies of scale. Our own anecdotal experience on the Hyrecar website also shows that most of the less expensive cars tend to be from dealerships, although there are no stats on this.

Hyrecar provides immense value to both sides of the platform, with the dealers able to earn passive income on their unused inventory and the drivers able to earn income from ridesharing. We believe this means that Hyrecar should find it easy to sign up both dealers and drivers, allowing it to grow revenue in the process.

There is also very little competition, with most car rental companies like Turo focusing on the leisure market. Hyrecar, meanwhile, is specifically built for ridesharing.

Attractive platform economics

Platform companies have very attractive economics. They tend to have strong network effects, high gross profit margins as they don't sell a tangible product and strong operating leverage as costs are mainly fixed. Its rare to find a platform company at a cheap price in this bull market, so we were very excited when we saw Hyrecar.

Although Hyrecar is smaller than most platform companies, it has similar economics, with over 60% gross margins and significant operating leverage, having increased expenses just 3% YOY despite growing revenues 67%.

It has a flywheel business model, in which more drivers would attract more cars, leading to lower prices, which attract more drivers still.

WY Capital representation

This leads us to our next point, the capital raise.

Capital raise

Although Hyrecar had previously said it could self fund, it did a capital raise in July at $3 a share, which is significantly lower than its IPO price.

Management explained in the Q2 call:

We had said in the past that we are going to bootstrap growth and self-fund, but if our dealer initiatives and OEM pilots began to heat up, we would look to raise additional capital to scale into those opportunities and relationships. To that point, we've been running our OEM dealer pilots for the past few months, and the results of those pilots are starting to float up to senior management at the OEM level. This news has accelerated conversations internally, but the size of our balance sheet was called into question as a potential hindrance to moving forward with larger partnerships. We felt it was in the best long-term interest of our shareholders to raise the cash needed to scale into these opportunities and remove any potential obstacles to partnership opportunities.

Q2 earnings call

It seems like management thinks that raising this capital will allow Hyrecar to further accelerate their flywheel and get more cars onto the platform.

This seems reasonable to us, and with management owning over 10% of shares outstanding, it seems to us that management may actually be acting in the best interests of shareholders.

Nevertheless, this capital raise shows that dilution is definitely a risk. Although we think management is still trustworthy overall, we would be wary of making this stock a large portion of our portfolio.

Q2 results

Although Hyrecar's growth continued to slow in Q2, from growth of 105% in Q1 to "just" 68% in Q2, this is still great for a company trading at just 3.8x sales. Growth has been decelerating over the past few quarters, but we expect deceleration to slow over the next few quarters as Hyrecar starts to use its offering proceeds to ramp up its car supply. We think growth deceleration over the past few quarters was caused by a need to conserve cash, but with this need gone, we believe deceleration should be reduced.

Profitability also continues to improve, with gross profit improving over 500bps QOQ to 61%. Net loss improved from a loss of $3.1mil to a loss of $2.0mil. We believe this improvement in profitability indicates substantial operating leverage.

With the capital raise, cash has been boosted to $15mil from just $5mil at the end of Q2. We believe this cash should give Hyrecar more flexibility and allow it to ramp to the stated goal of 10000 Daily Average Rentals.

Valuation

We've looked at many technology companies in the past and 3.8x TTM revenue is an absolute bargain for an asset light platform company growing at over 60%.

For reference, Facebook(FB), another favorite of mine, is trading at over 8x revenues, and even Uber(UBER) is trading higher than 4x revenues despite both of these platforms having lower growth than Hyrecar. Admittedly FB is extremely profitable, but with Hyrecar's massive operating leverage and similar gross margins, we have no doubt that it can achieve significant profitability too at lower revenue levels. Uber has more liquidity on its balance sheet, but it doesn't have Hyrecar's operating leverage.

Turo may be a better comparable to Hyrecar, and even it has breached the $1bil valuation. According to the WSJ, Turo generated $250mil in revenue in 2018, giving it a similar valuation to Hyrecar despite Hyrecar having a better growth runway.

Takeaway

Overall, Hyrecar's small size seems to have caused most investors to miss this high growth platform company with expanding margins, an aligned management team who owns over 10% of shares(rare for a high growth tech company), and a massive TAM. We think Hyrecar has significant potential and that the rewards far outweigh the risk. Given the capital raise, though, there are certainly risks.

Disclosure: I am/we are long HYRE. 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.