RumbleON: Potential Growth Opportunity, But Stock Overvalued (NASDAQ: RMBL)

Stock Market


Car with For Sale Sign

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Investment thesis

Even though RumbleON (NASDAQ: RMBL) does have an attractive powersports platform, I do not believe the stock should be priced high than its competitors due to expected lower growth. A drop in price or a clearer future would justify the risk-reward ratio better.

Table of contents

  1. Introducing RumbleON and its industry
  2. Competitive position
  3. Growth
  4. Margins
  5. Risks
  6. Valuation
  7. Conclusion

Introducing RumbleON

RumbleON, Inc. operates an e-commerce platform that aggregates and distributes pre-owned vehicles to and from consumers and dealers in North America. It operates in three segments: Powersports (including motorcycles), Automotive (including cars and trucks), and Vehicle Logistics and Transportation (automotive transportation services).

In March 2021, they announced an agreement to combine its e-commerce platform with the RideNow Powersports group, the nation’s largest power sports retailer, to create the largest publicly traded Powersports dealership platform.

RumbleON homepage

RumbleON homepage (RumbleON Website)

RumbleON is part of the online vehicle market. I selected several companies which have exposure to this market to create an industry proxy. Throughout this article, I will use a computed median of this group in order to benchmark RumbleON’s statistics.

Selection of companies with exposure to the online vehicle market:

Company name

Symbol

Market Cap

Carvana Co.

(CVNA)

10.25B

Vroom, Inc.

(VRM)

372.97M

Cars.com Inc.

(CARS)

1.01B

AUTO1 Group SE

(OTCPK: ATOGF)

2.97B

Cazoo Group Ltd

(CZOO)

1.93B

Competitive Position

While RumbleON operates in three segments, in its annual report, investor presentations and its main website the focus is on the powersports segment. In the annual report of 2020, powersports revenue only made up about 11% of the total revenue. This increased, with the help of its RideNow acquisition to almost 50% in the latest quarter.

As the nation’s first and largest publicly-traded technology-based powersports platform, it does seem to have a robust first movers advantage in this segment. They believe that its primary competitive advantages in this segment include its ability to provide a high degree of customer satisfaction, its 100% online marketplace platform its ability to make a cash offer to purchase a vehicle with its customer-friendly sales process, whether or not the customer is buying a vehicle from them.

I went through the feedback on its Facebook page to see if customers think the same.

It scores a 3.5 out of 5. Most reviews of buying are quite positive about the buying process. A lot of people were complaining about receiving low offers for its bikes and recommended selling on Facebook / Craigslist. This does not mean the buying / selling process is bad though in my opinion.

Furthermore, as RumbleON also keeps adding different brands and powersports types on its platform, I’d say the competitive advantage in the powersports platforms is quite strong.

However, regarding the other 50% of its revenues, the automotive segment, it’s incredibly hard to compete with and differentiate from all the other huge and experienced (online) car dealers.

Fundamental analysis

I split the fundamental analysis into two parts, (revenue) growth analysis and margin analysis.

Industry growth

According to a study, only 2% or buyers purchased a used car entirely online, meaning they never visited a dealership in person, which means there is a lot of potential to grow the online vehicle industry. However, what I believe is a huge challenge is that people might not completely feel comfortable buying an expensive object that is expensive, be it cars or motorcycles. While these types of businesses might have gotten an edge over its physical competitors during the lockdown, people might switch back to normal after the pandemic. The arguments above lead me to believe that online used vehicle industry will grow at around 15% or higher annually for the following 5 years.

RumbleON recent growth

Growth performance of RumbleON in the last few years:

Stock

Revenue Growth (Quarterly YoY)

Revenue Growth (TTM YoY)

Revenue Growth Rate (3Y)

RumbleON

88.66

19.42

284.85

Industry

117.88

129.37

54.98

Source: Seeking Alpha, income statement and earnings

Total revenue decreased by from 818 million USD in 2019 to 384 million USD for the year 2020, according to its 2020 annual report. Revenue in both the powersports vehicles and automobile vehicles segment decreased.

The decrease in vehicles sold resulted from:

(i) the adverse impact of COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales.

(ii) a reduction in automotive unit sales resulting from the significant damage to the Company’s operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado

(iii) Continued disciplined approach to sales volume and margin growth as they took steps to accelerate profitability

(iv) A reduction in per-vehicle advertising expenditures.

Recently they have been doing a lot better. However, its competitors have been doing even better regarding revenue growth in the last 4 quarters. While it’s hard to calculate the impact of tornado damages on the revenues on RumbleON, its competitors managed to also achieve better revenue growth rates in the last quarter, year-over-year.

Future growth

What took my attention is the continued approach to improve profitability and reduction in advertising expenditures as mentioned causes of revenue decline. Management, according to its latest earnings call, expects organic growth in its powersports segment at around 12.5% ​​for 2022. I do not expect an incredibly higher rate for automotive, due to its intense competition.

Growth estimates by analysts in percentage:

Stock

Revenue 2022

Revenue 2023

Earnings 2022

Earnings 2023

RumbleON

109.0

13.8

417.0

28.4

Industry

27.1

23.3

-30.25

16.1

Source: Analyst estimates from Seeking Alpha

The high expected revenue growth from analysts probably has to do with the fact that they have taken the revenue from the acquisition of Freedom Powersports in February into account. The 2023 expected growth rate is significantly lower than what is expected of its peers. While I do believe the gap is a bit much, I agree with the expectation of RumbleON not outperforming its peers.

Margins

I computed several key margins for RumbleON and its industry. The first number in the cells in the following table refers to RumbleON, while the number between the parentheses refers to the median of the industry.

Accounting item as% of revenue: RumbleON (Median Industry):

Accounting Item

Last 4 Quarters

2021

2020

2019

2018

Gross Profit

13.4 (12.5)

NaN (15.0)

7.6 (14.2)

6.0 (11.4)

8.1 (9.3)

Operating Expense

19.1 (16.7)

NaN (17.6)

13.4 (20.2)

10.5 (18.0)

23.0 (19.1)

Normalized EBITDA

-5.0 (-0.6)

NaN (-0.0)

-5.3 (-4.6)

-4.3 (-4.4)

-14.3 (-5.9)

Normalized Income

-5.7 (-2.4)

NaN (-1.0)

-7.4 (-4.8)

-5.4 (-3.2)

-16.1 (-3.8)

Source: Seeking Alpha income statement

While gross margin significantly increased, I do not believe that these rates are sustainable over the long-term. As supply and demand dynamics normalize, these gross margins will probably drop.

As stated before management is working towards profitability, which is why I expect the operating expense margin to converge to industry operating expense margin.

Risk analysis

Before I get into the valuation of the stock, I will touch upon the risks of owning RumbleON

Key risk measures:

Stock

52W Beta, daily

Market Correl

Debt / Equity%

Net Interest Coverage

RumbleON

1.02

0.17

101.86

-1.45

Industry

1.66

0.61

124.92

-15.76

Source: Yahoo Finance prices and Seeking Alpha

RumbleON has a beta of 1.02, showing that it’s barely sensitive to market movements. Correlation to the market is quite low, indicating a good additional diversification for a portfolio.

Interesting to see is the high debt to equity levels both for RumbleON and its peers, even though they barely yield positive EBITDAs. This indicates that they are risky businesses to own regarding their financial structure. This risk is fueled by the fact that competition is intense and doubts remain on what the growth rate of online vehicle sellers are online.

For RumbleON specifically, I believe another risk the M&A strategy of large acquisitions. Such an aggressive strategy is expensive and does not really show us how good the organic business model is doing or will be doing.

Valuation

Key valuation measures:

Stock

Enterprise Value / Revenue

Enterprise Value / EBITDA

Enterprise Value / Gross Profit

RumbleON

1.54

-26.04

11.48

Industry

1.12

-2.13

5,715

Source: Seeking Alpha

RumbleON is quite more expensive than its peers. I believe that the market takes into account that it does have the biggest powersports platform in the US that seems to offer a strong opportunity in an attractive niche.

The fact that RumbleON is only expected to grow organically around 12.5% ​​to 15% for the coming years, has no strong indication of achieving a decent EBITDA margin, and half of its revenue competes with extremely strong competitors. Combined with the fact that the peers are cheaper while expected to grow at a higher rate, I prefer to wait to see the results of its acquisitions and how the industry will grow after the pandemic to be able to sketch a better view of the future of the stock. Either that or the stock would have to drop in order to increase its risk / reward ratio.



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