- Shift has downsized significantly in order to bring profitability back into the black.
- Management is hoping a far superior streamlining process along with more affordable vehicles will increase margins.
- Risks such as a deep recession and higher interest rates remain to the fore.
- We await the 20-day moving average to be taken out before further evaluation ($0.29 per share).
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It will be interesting if Shift Technologies, Inc. (SFT) (e-commerce used car dealer) can turn things around after its recent transition. With scale (at least in the short term) having been sacrificed for better profitability, it will be interesting to see whether Shift's current plan to operate three hubs as opposed to ten can steady the company's financials. Costs have been cut right across the board, with far more focus now on streamlining sales as much as possible. The approved CarLotz merger has been well-priced in at this stage, so it will be interesting to see how many synergies can come off the deal.
In fact, the high-definition website photos, the comprehensive 150-check system, the 7-day money-back guarantee as well as the culling of the previous test-drive option should all help streamline sales as long as prices remain competitive on the front end. In fact, on that note, management is convinced that the company's shift to value offerings will bring more buyers into its wheelhouse but this remains to be seen over time.
From a technical perspective, shares still have it all to do. Although shares have now crossed above their 5-day moving average due to strong recent momentum, we would need to see this average cross above its 20-day counterpart before we could entertain any possibility of an initiation of a new bull run in Shift.
E-commerce growth is a fundamental tailwind for Shift as more and more customers look for hassle-free avenues when buying products online. Shift aims now to turn over profits much faster, which will facilitate accelerated investment back into the business. However, there are some trends out of Shift's control that investors should be aware of.
Elevated Risks Remain
Climate change advocates less fossil fuel being burned over time. If carbon taxes and the like gain traction in forthcoming years, this will adversely impact the cost of Shift's "value vehicles" going forward. These types of "stealth taxes" add to the real cost of the vehicle for purchasers, which ultimately will put downward pressure on second-hand car sales also.
We already see this in present trends, with car ownership levels in the US continuing to decline. Rising interest rates and inflation tie in with this point, despite management's belief that the transition to "value offerings" will bring more buyers into the frame here. The problem is that high inflation affects all buyers in that costs need to be fronted up for both the higher car price as well as the higher interest payments on any credit realized.
Suffice it to say, if present trends continue, buyers more and more are going to look for alternatives to fulfill their transport needs. Therefore, public transport, renting or leasing schemes, and car-sharing initiatives all will become elevated competition if indeed the cost of cars (through inflation and carbon stealth taxes), its associated credit as well as the cost of fuel continue to increase over time.
When it boils down to it, however, Shift's share price will be dictated by the relationship of its valuation to its profitability. Despite the lack of bottom line profit, we did see some encouraging signs in Q3, which the market may be beginning to price in. Remember, Shift remains ultra-cheap from a sales perspective (sales multiple of 0.03) but this really is the only valuation multiple investors can presently work off.
Heading Back Towards Positive Profitability
Suffice it to say, it is all about demonstrating to the market that the company now is on a solid path toward profitability. To this point, adjusted EBITDA improved by some $3.3 million in Q3 (-$30 million) on lower SG&A expenses in the quarter. Then, if we forward on to what management is projecting in Q4, we see an estimate of approximately -$23 million in adjusted EBITDA which, if met, would be a $7 million improvement over the third quarter (23% potential improvement).
These significant improvements in both costs and earnings are down to the transition to higher margin value-orientated vehicles. Although the finance and leasing business will suffer as a result, management believes there is enough buffer in the vehicle margins to absorb the reduced profitability from the F&L segment. Suffice it to say, if present trends persist, and Shift can stop the bleeding per se and start generating some positive cash flow, the stock should definitely rally from present levels due to literally how oversold the stock is at present. Risks (which have been pointed out earlier) obviously remain (which would be compounded by a recession), so it will be interesting to see Shift's numbers in Q4 and beyond.
Therefore, to sum up, although elevated risks remain in this play, share price action has been impressive in recent sessions as improving profitability trends begin to get priced in. Let's see what Q4 brings. We look forward to continued coverage.
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