How Does The New German “Mega Unicorn IPO” Auto1 Compare To Just Eat Takeaway.com? by Value And Opportunity

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Q4 2020 hedge fund letters, conferences and more

The Auto1 IPO

Tomorrow, Auto1, the new German “Mega Unicorn” will go public and trade for the first time. At the upper end of the current book building range (38 EUR/share), which turned out to be the IPO price, the company is valued at almost 8 bn EUR. And that is before the expected “pop” at the IPO.

The company has currently 173 mn shares outstanding and will will issue 31.25 mn new Shares for around 1 bn that will go to the company. Another 15,625 mn shares will offered by existing shareholders, including the founders and the management.

As I will line out in the post, despite the very different sector (used cars), the underlying business model is somehow similar to Just Eat Takeaway.com (JET), a stock I have written about recently. The aim of this post ist to compare the business models of Auto1 and JET and to also compare the valuation the market grants to these 2 companies.

Spoiler: there will be no “actionable insights” in this post.

Auto1 business model

Auto1 has clearly disrupted the German used car market. The company, founded in 2012, had (prior to Covid-19) very aggressive marketing under their brand “Wirkaufendeinauto.de” which offers an easy way for private customers to sell their car quickly for cash. For this purpose, they run around 400 “centers” where clients can got to, let their car being assessed and then receive either a direct offer or during the next few days a better offer from one of the 60.000 used car dealers that are on the platform of Auto1 and who have direct access to the cars being assessed by Auto1. If a deal gets done, Auto1 will ship the car to the dealer.

In principal business model terms, Auto1 runs a 2-sided market place with a “physical” component, as the cars need to be shipped to their ultimate destination. In technical terms, the main business of Auto1 is a “C2B” business, they enable businesses (used car dealers) to buy from retail clients across Europe.

Auto1 has a small second segment, which accounts for around 2% of their sales where they try to enable “C2C” transactions via the brand “AutoHero”.

Similarities Auto1 & JET

As my readers know, with Just Eat Takeaway.com I(JET) I have bought a more “aggressive” growth stock recently. In contrast to Auto1, the company runs a “B2C” platform, connecting restaurants with hungry consumers who want a meal delivered to their home. However the business also contains a physical component, as the meals have to be delivered. But in the end, both companies run a two sided market place with a physical delivery component.

Such two sided market places with physical goods mostly have a limited amount of “margin” that the owners of the platform can charge as customers and businesses are usually not willing to sacrifice all of their own margins to be on the platform. Interestingly, Auto1 and JET have chosen 2 different ways to account for revenues:

Whereas JET accounts for as the typical GMV (Gross Merchandise Value) vs. Net revenue method, i.e. only showing their “margin” as revenue, Auto 1 has chosen to show the full market place revenue as their revenue. This is an overview how the two companies compare in size and gross profit (estimates are mine):

So although Auto 1 shows more revenue, this revenue is actual GMV. So JET’s marketplace in 2020 is around 5x bigger than Auto1. Interestingly, on a same for same basis, i.e. based on GMV, the stated Gross profit margin is about the same for both companies, which is not a big surprise.

Substitutes/Competitors:

Both business models are clearly subject to substitute products. For JET, a substitute is normally just to eat in a restaurant or directly call a restaurant for delivery. Or cook at home or eat a frozen pizza. So JET needs to make sure that their offering is convenient and price competitive. I have written about competition already in my first post. There is clear competition in many markets, however JET managed to be the NR.1 in most of the relevant markets.

Auto1 also faces a couple of substitute and/or competitors. The main substitute would be to list one’s used car in one of the car sales portals like Autoscout24 etc. Usually this will deliver the best price but is the most inconvenient way as the seller needs to interact with many potential buyers which can cost a lot of time and nerves. So depending on the value of the car, Auto1 might be the most convenient offer. However once you have a more valuable car.the price difference is just too high. Remember, Auto1 is taking a cut and then selling to another used car dealer who takes another cut who then sells again to a consumer. This is also the explanation that the average selling price to Auto1 is at around 5500 EUR which indicates that their platform is used mostly for older cars and that most customers think its worth the effort to sell direct C2C if a car costs significantly more than 5000 EUR. Other substitutes are “trade ins” for a new (used) car or just sell it outright to a local used car dealer. However, the selling price is usually very low.

With regard to competitors, there are a lot of smaller players in the used car market. The big competitors will most likely be the OEMs going forward. Volkswagen for instance is pushing with Heycar into the market and others will clearly follow. However I would say that it is slightly more difficult to enter Auto1’s main market Germany, as the required entry needs to be more on a national basis and would require more capital than a “city by city” market place like food delivery.

Main differences

1. C2B vs. B2C

One big difference of a C2B model vs. a B2C model is, that consumers usually are expected to pay or receive cash without delay, whereas businesses are usually expected to pay or get paid within 4 weeks or so. A typical direct B2C business (“D2C”) has therefore often very low working capital needs or even negative working capital (see Alimentation Couche-Tard). This is how that looked in 2019 for Auto1 vs. JET:

As expected, Auto1 needs a lot more working capital than JET. This is especially important if companies grow a lot. JET’s business can grow without requiring (a lot) more working capital, whereas Auto1 need 7 EUR Working capital for every 100 EUR sales growth. As Auto1 is expected to grow a lot, the company needs to put a lot of cash into working capital.

As a side remark: The psoitive Operating Cash Flow Auto1 is showing in 9M 2020 is not a sign of profitability but the result of shrinking sales and tehrefore working capital release. This will turn around once the start growing again.

2. Recurring revenue vs. one-off

Another difference that is harder to quantify is the fact, that a typical consumer at JET is ordering around 2-3 times a month, whereas a typical Auto1 Consumer customer only sells a used car every few years. In general, “Stickiness” is  higher, the more frequent a service is used. Without stickiness, marketing expenses are significant just to keep the level of current bsuiness, whereas a sticky bsuiness with low churn can direct marketing expenses into growth.

Auto1 mentions in their prospectus, that their marketing expense declined from ~3% of sales to ~2,5% in 9M 2020. JET in comparison had ~2,9% marketing expenses in 6M 2020. So marketing seems to be slightly more expensive for JET as Auto1. However as we will see in the next paragraph, the result of these marketing expenses on growth is vastly different.

3. Growth rates

Now comes the interesting part: What kind of growth rates did the two companies experience ? And there we can see a BIG difference:

On a “same for same” basis (ex M&A), JET grew top line 70% in 2019 and 37% in 2020, whereas Auto1 “only” managed 23% in 2019 and actually shrank by -19% in 2020.

I think this is a combination of two factors: First of all, clearly JET has benefited from Covid-19, as one substitute for their product, restaurant visits disappeared. However I think there is also another factor in play: As mentzioned before, Auto1 has to invest into marketing just to keep last years revenue as they always need to make aware customers again after a few years. JET’s customer base, especially the older vintages shows a clear “negative churn”, i.e. existing customers order more over time, whereas Auto1 needs to fight for customers every time. So also looking into the future, I do expect that JET gets more “bang the buck” in customer value.

4. Profitability

Another big difference is that Auto1 has never been profitable, not even their home market Germany. JET in contrast is highly profitable in the Netherlands and also the UK business of Just Eat was very profitable.

If we compare accumulated losses to actual GMV/Sales, we can clearly see that Auto1 required both in absolute terms and much more in relative terms a lot more of “investment” in form of losses than JET to generate 1 EUR of sales:

In aggregate, both companies will be somehow EBITDA break even in 2020, but I am pretty sure that Auto1 will need to go EBITDA negative again for the foreseeable future to achieve the projected growth, whereas there is a higher likely hood that JET turns EBITDA positive a lot sooner. Or in technical terms: The Customer acquisition Cost for Auto1 is much higher compared to the customer lifetime value compared to JET.

5. International expansion

JET has shown that the business model works across many countries. Maybe not in every country at the same time, but still, most western countries seem to allow for such a business model, be it as a platform or including delivery. The major open point is how profitable such a business would be in the end.

Auto1’s business model mostly works in Germany. Yes, they sell internationally throughout Europe, but the acquisition model is a German one. This seems to follow the well known pattern, that used German cars are in high demand especially in Eastern Europe, as the conditions of the cars are very good, due to good roads and the regular required check-ups every 2 years. It is yet to be seen if and how they can tap into other markets form a buying perspective at scale. And as mentioned above, not even the German business is profitable.

Comparing Valuations

One word of caution: Buying a stock because it is relatively cheap to other (similar) stocks as such ist not a great strategy. It could be that the other stock that looks expensive is even so expensive that the stock you are looking at is not cheap either. However, in order to get context and a different perspective, it is useful sometimes to compare to stocks in order to understand the relative valuation.

So this is where the rubber hits the road. Pre GrubHub, this is how valuations look for Auto1 vs. JET:

I only used Sales and Gross profit as EBITDA, EBIT and Net Income at the moment are not applicable. For those who have read the post so far: Please judge for yourself if Auto1 is worth around 2.7 times the multiples of JET.

Personally, I do think that JET has a significant more attractive business model and I would have expected the relative valuation to be the other way round, but it is what it is.

However I forgot one very important valuation metric: Total Adressable market (TAM).

Auto1 thinks its TAM is 700 bn EUR, whereas Catrock estimated JET’s TAM to only 592 bn EUR. Therefore Auto1 indeed looks cheaper than JET:

Summary:

Auto1 is clearly an impressive growth story and their IPO looks like a big success. However in my opinion, in relative terms, JET looks more attractive from a business model perspective and from a relative valuation, unless you believe that TAM is the only relevant metric.

However I would not advise on shorting Auto1. In this market everything is possible and with an expensive stock as currency, good capital allocators can achieve a lot. And one should never underestimate the crazyness of Softbank who is the biggest shareholder.

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