By Jarrett Banks
Online used-car retailers like Vroom, Inc., Shift and Carvana Co. have thrived as the Covid-19 pandemic has sped up the adoption of e-commerce and the rejection of public transportation. Now Carlotz Inc., a privately held company that has seen exponential growth from its consignment model, may soon offer public investors a sui generis opportunity to get in on the trend.
Carvana and Vroom are money losers in a fast-growing industry. Carlotz is growing faster than all of them, is profitable, has the lowest customer acquisition cost and has the highest net promoter score. Its proprietary technology and asset-light consignment business model also make it meaningfully more attractive than competitor business models.
The consignment model, in which owners can drop the car off at the lot and pay a small fee for the company to market and sell it, is popular with millennials and businesses. It also takes the pressure off of anyone who wants to sell a car but doesn’t have the time to conduct pricing research. Pre-owned car sales have risen 5.2{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} annually since 2010, double that of new vehicles.
Several tailwinds have been boosting the prospects of Carlotz, founded in 2011 and based in Virginia. In addition to increasing e-commerce adoption, consumers have been snapping up used vehicles so they can skip trains, buses and Ubers, as well as save money in an unclear economy.
The Carlotz Senior Management Team
In July, the average value of used cars jumped more than 16 percent, according to Edmunds.com. That came after a two-month shutdown of new car production in the spring. Long before the pandemic, Carlotz had already established an online, touchless, safe and secure way to buy a car.
The online used auto market is highly fragmented. Carvana is the largest U.S. automotive dealer by market cap, with a valuation that exceeds longstanding used-car retailer CarMax’s by $10 billion, despite selling one-fifth as many pre-owned vehicles at retail.
Shift, which recently announced it would go public through a SPAC, is trying to follow Carvana’s car vending machine model. Shift sells exclusively used cars, an area national chains are flocking to. Margins on new vehicle sales are getting thinner as car manufacturers demand more investments and impose sales target incentives that can eat into profits.
Although many investors may not have heard of Carlotz yet, this disruptor continues to innovate, and is poised to become much more important to traditional dealers even after the pandemic subsides.
If Carlotz does go public, it should command a healthy valuation, given its profit profile and superior growth rate. Carvana, which is still losing money, trades at an enterprise value of 6.7 times 2020 sales and Vroom, also profitless, trades 4.4 times, according to Sentieo, an AI-enabled research platform. Savvy investors have much gain from focusing on Carlotz now – before word really gets out.
Jarrett Banks
Editor-at-Large
IPO Edge
jb@capmarketsmedia.com
Twitter: @IPOEdge
Instagram: @IPOEdge
