Why CarLotz Stock Looks Attractive Right Now

Summary

• In Q3 2021, net revenue of the company increased by 128% to $68 million.
• Net losses increased to $3.5 million in the Q3 from $0.5 million in the year ago quarter.
• The company has opened 14 new hubs in 2021 to reach a cumulative number of 22 hubs.
• The new hubs are not generating results as expected and the pandemic has adversely affected the business.
• The company offers a digital and hassle-free process for its retail buyers, including a whole range of services like financing, insurance, and extended warranties.

EHStock/iStock via Getty Images

Investment Thesis

CarLotz (LOTZ) is increasing its revenue and opening new hubs. As and when the retail-wholesale pricing environment becomes more favorable for CarLotz, the company should do well. The company aims to return to mainly consignment business model as the chip shortage issue gets resolved. Such asset-light inventory sourcing model allows the company to source its vehicles at a limited capital risk.

An Overview

Virginia-based used car company CarLotz was founded in the year 2011. The company offers a consignment-to-retail used car marketplace that gives its sourcing partners and used vehicle retailers an easy access to the retail sales channel. It operates a technology-based buying, sourcing, and selling model that offers a broad selection of vehicles and an omni-channel experience. It currently operates 22 retail hub locations in the U.S.

CarLotz went public in January 2021 by merging with SPAC Acamar Partners Acquisition Corp.

Product Overview

CarLotz sells used vehicles to its retail customers through its hubs located in the U.S. The company sources vehicles from both corporate partners and retail sellers.

The company offers its products and services to its corporate partners, retail sellers, and to retail customers who are looking to buy used cars. Fleet leasing companies, finance companies, wholesalers, corporations managing their own fleets, and OEMs, are the company's corporate vehicle sourcing partners. Buyers can see the vehicles online through the website or at the company's locations, along with its financing and insurance products.

The company has developed a proprietary technology for its corporate car sourcing partners that integrates with their internal systems and supports every step of the consignment and sales process. It has also developed tools to supplement such platform, providing real-time data to its corporate vehicle sourcing partners and retail sellers. As the company is continuing to improve its technological solutions, it offers a digital and hassle-free process for its retail buyers.

Source: CarLotz

CarLotz's Revenue Model

The company generates most of its revenues from the sales of used vehicles. These vehicles are sold to retail customers from its hubs located throughout the US. The customers frequently trade their existing vehicle to apply towards the transaction price of a used vehicle. This generates revenue for the company on the sale of a used vehicle to the customer trading-in their vehicle, as well as the traded-in vehicle when it is sold to a new owner.

The vehicles are also sold to wholesalers or other dealers, primarily through auctions. CarLotz also makes revenues by offering retail vehicle buyers services like financing, insurance, and extended warranties.

Industry Factors

The used vehicle market in the U.S. is huge. It generated around $841 billion revenue from roughly 41 million units in 2019, as per Edmunds Used Vehicle Report 2019.

There are approximately 50,000 auto dealers in the U.S. The market is fragmented with the largest dealer controlling less than 2% share in 2019. CarLotz represents roughly 0.02% of the U.S. used car sales by volume, which indicates an opportunity for robust growth.

The pandemic has resulted in a heightened demand for used cars. This has resulted from a combination of factors, including rising preference for own vehicles rather than public transport or ridesharing, as well as supply shortages impacting production of new cars.

Competitive Environment

The used vehicles market in the U.S. is highly competitive and fragmented. Many transactions occur in peer-to-peer market. There are roughly 50,000 used vehicles dealers in United States.

CarLotz's competitors in the used vehicle market include large national car dealers, i.e., CarMax (KMX) and AutoNation (AN), which are expanding into online business; digital and physical auction businesses, such as ADESA, Manheim, ACV, BackLotCars, and several other smaller independent auctions.

The company also faces competition from car rental companies such as Hertz Car Sales and Enterprise Car Sales, which sell directly to consumers vehicles previously used in their rental fleets.

Further, it faces competition from online platforms such as Carvana (CVNA), Vroom (VRM), and Shift (SFT).

Business Outlook

Due to a sustained shortage of semi-conductor chip and COVID-related supply chain issues constraining supply, the margin between retail and wholesale prices of used vehicles has been compressed. This, in turn, has reduced the incremental value which CarLotz delivered to its corporate vehicle sourcing partners, making consignment less attractive to the partners than selling vehicles through the wholesale channel. The lack of new vehicle supply caused by the semi-conductor chip scarcity limited the supply of used automobiles from CarLotz's corporate vehicle sourcing partners.

What's more, the company isn't sure when the used vehicle market will return to a more normal state.

On the positive side, the company has seen some improvements in the third quarter, compared to the second quarter of 2021. Michael Bor, Co-Founder and Chief Executive Officer of CarLotz, noted during the third quarter call,

As we worked to improve all of our sourcing channels in the face of this adversity, we have made progress in lessening our reliance on options to source vehicles. While monthly sourcing can vary based on seasonality and growth needs in June about 70% of our inventory and flow is being sourced at auction, while in October that number was less than 50%. In part the increase in unit sourced non-competitively this past quarter is a result of new accounts, the rekindling of a prior account and the wholesale retail pricing environment making consignment more attractive than in the recent past.

Due to strong wholesale market for vehicles, the corporate vehicle sourcing partner that accounted for more than 60% of the cars CarLotz sold during the Q4 2020 and Q1 2021, informed the company in May 2021 that it would be pausing its consignment of vehicles to CarLotz. The partner, however, has returned, though with a lower volume. Speaking of the positive developments, Bor added,

As we mentioned on our last call, the partner who paused our relationship during the height of the wholesale pricing disruption has returned and is now consigning again accounting for about 10% of our sourcing volume in October. In addition, we have added new corporate partners to our sourcing mix, while seeing more corporate sourcing partner pilots in Q3 than in Q2. Also encouraging from a sourcing perspective is the increase in units sourced from consumers through consignment trade-ins and purchases.

Meanwhile, hubs opened by CarLotz in 2021 have not been performing as predicted. Also, during the three months ended September 30, 2021, the company had a lower retail GPU (gross profit per unit) because of decreased pricing on aging inventory, reducing the margin between the selling prices and the acquisition costs on owned inventory.

The company is planning to expand its regional hub network by opening new hubs in 2022, but fewer than in 2021. It opened two new hubs in Alabama in December 2021.

Financial Performance

CarLotz reported revenue of $175.4 million for the nine months ended on September 30, 2021, which is 115% higher compared to a revenue of $81.6 million for the nine months ended on September 30, 2020. During the same period of 2021, net losses increased to $25.7 million compared to $2.2 million losses reported in the same period of 2020.

The major reason of difference was increase in selling, general and administrative expenses to $63 million during the nine months ended September 30, 2021, from $11.1 million in the comparable period in 2020. The increase was mainly due to additional expenses incurred due to being a public company, increased head count in the new hubs opened, additional marketing expenses, and technology upgradation expenses.

Source: CarLotz's Form 10-Q for Q3 2021

The company has reported liquidity of $201.2 million as on September 30, 2021. The management believes that the current liquidity level is sufficient to perform operations for at least the next 12 months.

The company expects to continue incurring losses until it achieves scale and can leverage its operating costs. The hubs opened in 2021 are not generating results as expected. If this does not improve, it may impact the company's expansion strategy, or the company may have to raise equity or debt financing to continue expansion.

Risk Factors

• Due to strong wholesale market for vehicles, the corporate vehicle sourcing partner that accounted for more than 60% of the cars the company sold during the Q4 2020 and Q1 2021, informed the company in May 2021 that it would be pausing its consignment of vehicles to CarLotz. Although its corporate vehicle sourcing partner restarted consignment of automobiles in the Q3 2021, but they have not returned to the same volume of vehicles. There is no guarantee that they will return to the same volume, or that the price, types, and quality that will be attractive to CarLotz.
• Certain automakers have experienced slower production of new vehicles due to the COVID-19 pandemic's effects, as well as shortages of semi-conductor chips and other automotive supplies since the beginning of 2020. The decrease in new vehicle supply has constrained the quantity of used vehicles available through the company's corporate sourcing partners, and the same is expected to continue in 2022. To compensate for the decrease in supply from this source, the company has sourced a bigger percentage of its vehicles through wholesale auction channels than in the past. Because the company is purchasing these vehicles, it has increased risk on the margin between the vehicle's cost and its selling price. It has witnessed gross profit compression in the third quarter 2021, which is expected to continue throughout the year. Its inability to turn inventory rapidly and the rate at which second-hand automobiles deteriorate could worsen the risk.

Conclusion

The company is continuously improving its technological solutions. A fragmented market means significant growth opportunities for CarLotz. In addition to the return of a positive market environment, adding experienced management personnel could help in the company's turnaround.

Data by YCharts

As and when the retail-wholesale pricing environment becomes more favorable for CarLotz, the company should do well. It aims to return to mainly consignment business model as the chip shortage issue gets resolved. Such asset-light inventory sourcing model allows the company to source its vehicles at a limited capital risk.

Seeking Alpha's proprietary quant ratings give 'Neutral' rating to CarLotz stock. While the stock is rated high on valuation and revision factors, it has been rated low on the profitability and momentum factors.

CarLotz stock has some scope of an expansion in its forward price-to-sales multiple, as its business improves. Overall, though risky, CarLotz stock looks attractive right now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[The Real Cavalier]

This article was published on January 4th. The day the stock market hit its all time high and thereafter began its slide to where we are now. Regrettably, that period has not been kind to money losing growth stocks in general (Carvana and Shift are examples in the used car sector) and LOTZ in particular.

I learned in 2000/2001 by getting my ass kicked in the web portal sector. A new crop of investors has learned a similarly costly lesson.

Learn from this debacle as best you can. Be more circumspect next time. GLTA.

[Weather Man]

Unfortunately, between chips, supply lines and the Green EV insanity, the shortage of new inventory looks to continue for longer than LOTZ would care for. Just no reasonable timeline for them to make good money justifying a higher share price.

[The Real Cavalier]

In fairness to the author this article was published on Jan. 4 the day the S&P hit its all time high. A little bit has changed since then to say the least.

[g.christie_00]

Do you still consider Carlotz a buy even though has lost virtually every cent of its value?

[DeanCollinsNYC]

@g.christie_00 yep :)

[dan87951]

The company has no debt and is now trading well below NAV. Seems like a decent play at these levels considering cash burn has slowed considerably quarter over quarter. In Q3 cash on hand was 201.2M and in Q4 they had 195.9M.

[The Real Cavalier]

Every comment I've made on this article has been proven true. I don't bat 100 but I nailed this one.

[Bangback]

@DavidHHolmes Yep, you called it. This is most likely a zero unless they turn around FAST. Their burn rate is out of control.

[The Real Cavalier]

@Bangback I am not short. This situation brings me no joy. Major layoffs in the works. With no new hubs added it isn't possible to grow themselves out of this problem situation. Read about my sale hypothesis. That's their only chance. Get acquired by a partner that can feed them product (cars). Sell ASAP.

[Maschuette]

@Bangback going off memory, their cash burn seems to be slowing down quarter/quarter. They had about 200 million last quarter a d now they are at 193 million. And now they are reducing expansion to preserve cash at the same time their revenue has been increasing. This thing aint going to zero.

[ProfessionalBagHolder]

How about now….LOL!

[The Real Cavalier]

Heads up...an unmitigated disaster was just announced.

[Weather Man]

Q4 conference call seems late.

[The Real Cavalier]

@Weather Man As you saw it will be after the market closes on March 15th. That is the last permissible day under SEC rules for U.S. domiciled filers with a December 31st fiscal year end. I guess they just need the time.

[The Real Cavalier]

Does anyone know if the Adesa acquisition by Carvana will affect LOTZ?

[Weather Man]

Well, looks like bargain hunters are on the prowl. The used car market is tough, so really hoping the next quarterly call is solid, confident and coherent.

[The Real Cavalier]

Market cap of $200 million is equal to cash on hand at 9/30.

[George Spritzer, CFA]

@DavidHHolmes Do you think CZOO could be a potential acquirer of LOTZ? They have been buying up companies in Europe, but they may not have enough bandwidth to expand to the US yet.

[The Real Cavalier]

@George Spritzer, CFA Let me do some research before I can provide a thoughtful reply.

[dnara]

@George Spritzer, CFA Cazoo seems focused only on Europe but I agree - if they look to grow a presence in the US, it's hard to ignore the low cost of LOTZ now. All in all, based on the success of CVNA, I think this model is here to stay and will only grow. I think there's great value in SFT and VRM too. I would like to see LOTZ look at what CZOO is doing in terms of subscription car services...it's a nice additional vertical and I think is another model that will continue to grow in the urban areas where LOTZ has set up hubs.

[ProfessionalBagHolder]

Looks even better now than it is under $2. All I can say is there will be a lot of people in 2025 saying if only I had bought this when it was under $2. So much irrational panic selling right now, but it's creating so many extreme bargains.

[The Real Cavalier]

Broke $2.

[Weather Man]

Gonna be ugly until the car makes get supply lines fixed and production rolling. So damn tempted to add to my position.

[The Real Cavalier]

@Weather Man A little nibble at $2 is a good bet.

[bazooooka]

@Weather Man the problem is sourcing cheap/good used cars is more competitive then they every imagined. Any half decent used car more likely to end up on an online platform and not at auction or trade-in like it was yester-year. CarLotz will have to find attractive used car supply lines asap or continue to melt. It's worth a nibble below two bucks but anyone that took a big bite earlier likely not happy.

[The Real Cavalier]

I've been thinking about the LOTZ situation. If I was an M&A banker and I was advising LOTZ (yes formerly and no I'm not) I'd propose they find a merger partner ASAP. LOTZ's greatest asset in a merger is its $200M of cash that is diminishing every month. If they wait a year, and the business is still unprofitable, they'll have no negotiating leverage whatsoever. Now they have the cash and the projections that they can use that show the business will turn a profit in 4 to 6 quarters.

As to merger candidates, ideally they need to partner with a used car seller that doesn't have a bricks and mortar presence. That means forget about the likes of Carmax or Carvana. It isn't feasible to retrofit the LOTZ stores to either of their models for obvious reasons. I'd lead with SFT, VRM, CARS and CARG.

An outside the box idea is their biggest supplier KAR which has experience in physical retail through its auction businesses. I guess I'd also throw in PAG and the public new car sellers...LAD, GPI, AN, ABG, etc.

Just some thoughts from a former auto banker.

[Maschuette]

@DavidHHolmes What price do you think they would get if they put a deal together in the short term?

[The Real Cavalier]

@Maschuette Not a perfect analogy but I note the MetroMile (MILE) / Lemonade (LMND) pending merger. MILE is a failed SPAC like LOTZ and with coincidently approximately $200 million of cash and losing similar amounts per quarter. It's a stock deal at 1 for 19 so at the time of announcement LMND was trading at aprroximately $65 so each MILE share was worth $3.40ish. MILE was trading around $3 so say a 10 to 15 percent premium. I note the problem with a stock deal is that the LMND stock has collapsed so MILE is trading at $1.65 today.

Honestly, LOTZ is worth cash plus a little bit for the build out to date so maybe $2.50 to $3. Not what many shareholders would hope to hear but you do get a play on the merged company. Some of the prospective acquirors I mentioned have proven business models and bright futures.

Just my 2 cents.

[Maschuette]

@DavidHHolmes I appreciate your two cents. My cost basis is 3.33 but the options market is pretty good for LOTZ. I'm selling covered calls for a nice return while I wait for something to happen. I'm hoping the consignment market improves for them over the next quarter or so. If they can reduce their cash burn then all their options will improve. We will see.

[Weather Man]

Damnit, I thought $2.29 was as cheap as I was gonna get in at!

[cssys]

the chart looks like death...

[DeanCollinsNYC]

@cssys Check the FINRA short reports twice a month.

the company itself is doing fine and have been increasing sales quarter over quarter......the reason for the price action is the hsort position getting bigger ad bigger.

I have 45,000 shares with a $3.37.....i have zero interest in selling and every time it drops 10c i buy another 1,000 shares. This will be $4 after the quarterly call in a few weeks when they announce 3,000 cars sold in Q4 (we know this from the VIN scraper) and pretty much a break even qtr (or within a few cents).

until the shorts reduce their position (around 6,500,000 shares sold short) im not worried that the price isnt going up - if they cover their short positions to less than 2m shares and im still not in profit.....then i'll worry.

until then.....its discount shopping day.

[Michielll]

The key difference between Carlotz and the other second hand car platforms is their consignment model. This model is interesting mostly because of it enables Carlotz to make money selling from cars which are not on their balance sheet. This means (much) less investment capital needed, a high inventory turnover and less obsolescence risk. It does still incur costs to prepare cars for selling.

This model has been proven in the past in a very small size in a stable market (with one mayor consignment partner). Last year it shown that this is risky, when prices of second-hand cars are unstable. This company has faced headwinds in the early stages of expanding during 2021, due to the chip shortage and subsequent second hand car prices increases. However, the company has shown recovery on consignment supply side (new consignments partners, returned consignment partner) while it kept investing on demand side (new hub openings, marketing, IT development). Having a bigger name with more hubs, could potentially further increase the number of interested consignment partners and increase the interest from customers. Therefore I am very interested in what Q4 21 and Q1 22 will look like.

[Ondrocs4, CPA]

@Michielll I might be wrong but I think they charge $99 to inspect and prep each vehicle.

[Weather Man]

Until dealerships have new inventory on the lot, gonna be tough sledding for any company trying to sell used. I picked up some LOTZ, but it may be close to a year before things improve and maybe closer to 1.5 years.