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The Most Asymmetric Risk Reward Opportunity In The Market
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CarLotz is one of the most promising young names that I like right now, and this is a play on the warrants of that company, which are listed.
Firstly, the underlying:
CarLotz is an online used car consignment company. Think CVNA, except CarLotz doesn't own the inventory, rather just markets used cars people / companies want them to sell. This stands opposed to the dominant model right now, which involves buying used cars from wholesalers, taking inventory risk, then charging a ~14% average premium to the end retail buyer. LOTZ has an extremely asset light, profitable, high growth business model, as it removes a lot of the barriers / middle men involved in the used car market and can provide tremendous value to everyone involved. As a result, the company expects over 500%+ sales growth over the next 2 years as they continue their nationwide rollout, and enjoy other step improvements in CAC, gross margin, and other KPI. I love this company, and if you want any clue as to how much a revolutionary online car company reward investors, look at CVNA, which went from $11 in 2017 to $283 as of close Friday. LOTZ is arguably a better business model, and simply earlier along its growth curve. Here are some highlight from the initial SPAC presentation:
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The highly-fragmented, $841 billion U.S. used vehicle market is ripe for disruption with less than 1% e-commerce penetration and less than 0.1% Retail Remarketing penetration today, providing a significant market share opportunity for CarLotz.
CarLotz offers a compelling value proposition for corporate vehicle sourcing partners and retail sellers who, on average, receive approximately $1,000 more for their vehicles, net of all fees and expenses, than when utilizing the alternative wholesale sales channel (e.g., auction, trade-in, etc.).
Customers who buy their vehicles from CarLotz also share in the upside created by CarLotz’ pioneering consignment-to-retail sales model, which on average saves up to $1,000 as compared to traditional used car dealerships.
CarLotz’ contactless end-to-end e-commerce capabilities give buyers the opportunity to transact the way they’re most comfortable: on the internet, over the phone or in-person.
The industry’s only asset-light consignment sales model, with 90% of CarLotz’ vehicles non-competitively sourced and 60% sourced from its corporate vehicle sourcing partners, enables CarLotz to operate without the need for significant capital or capital at risk to support traditionally owned inventory.
CarLotz is the only omni-channel used vehicle business that makes it possible for corporate vehicle sourcing partners to sell their vehicle inventory at retail prices. CarLotz’ proprietary Retail Remarketing technology is fully integrated with those of its corporate vehicle sourcing partners providing an easy and seamless remarketing experience, as well as industry leading reporting, data analytics, pricing information and vehicle triage decision-making.
CarLotz is high-growth, run-rate profitable and cash-flow breakeven.
CarLotz is poised to take advantage of significant near-term growth opportunities anchored on its nationwide expansion plans, increased inventory from existing and new corporate vehicle sourcing partners, cutting-edge technology platforms and increased focus on marketing.
The transaction is priced at a multiple of 0.88X estimated revenue for fiscal 2022 and a multiple of 6.8X estimated gross profit for fiscal 2022, a meaningful discount to CarLotz’ publicly traded peers.
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As you can see there, LOTZ trades at LESS THAN 1x times 2022 sales. If this multiple remains accurate, it implies a share price of >$20 in 2022, as 2023 projections put revenue around 1.5 Billion. It's basically unheard of to find a good quality growth company trading this cheap compared to it's projected YoY growth rates. In my opinion, the company will re-rate higher, as people begin to understand the story. In my view, this should be a $80-$100 within 2-3 years. So what's the trade here? Just buy, right?
Well as it turns out, there is an even better way to play this. LOTZW. LOTZW are LOTZ warrants, which expire in 2026 and have a strike price of $11.50. This means that anytime between now and 2026, one warrant entitles you to buy one share of LOTZ for $11.50. Considering that LOTZW trades right now for about $2.50, this means that if you buy LOTZW, your breakeven on the underlying LOTZ stick will be ~$14. While 14 is almost a 60% premium to the current share price, I believe that between now and 2026, this company will be in the triple digit range, which would mean an unbelievable return for these LOTZW warrants. Essentially, we are buying an extremely far out OTM LOTZ call. That's a bet I'm more than happy to take.
Cheers!
Firstly, the underlying:
CarLotz is an online used car consignment company. Think CVNA, except CarLotz doesn't own the inventory, rather just markets used cars people / companies want them to sell. This stands opposed to the dominant model right now, which involves buying used cars from wholesalers, taking inventory risk, then charging a ~14% average premium to the end retail buyer. LOTZ has an extremely asset light, profitable, high growth business model, as it removes a lot of the barriers / middle men involved in the used car market and can provide tremendous value to everyone involved. As a result, the company expects over 500%+ sales growth over the next 2 years as they continue their nationwide rollout, and enjoy other step improvements in CAC, gross margin, and other KPI. I love this company, and if you want any clue as to how much a revolutionary online car company reward investors, look at CVNA, which went from $11 in 2017 to $283 as of close Friday. LOTZ is arguably a better business model, and simply earlier along its growth curve. Here are some highlight from the initial SPAC presentation:
-----
The highly-fragmented, $841 billion U.S. used vehicle market is ripe for disruption with less than 1% e-commerce penetration and less than 0.1% Retail Remarketing penetration today, providing a significant market share opportunity for CarLotz.
CarLotz offers a compelling value proposition for corporate vehicle sourcing partners and retail sellers who, on average, receive approximately $1,000 more for their vehicles, net of all fees and expenses, than when utilizing the alternative wholesale sales channel (e.g., auction, trade-in, etc.).
Customers who buy their vehicles from CarLotz also share in the upside created by CarLotz’ pioneering consignment-to-retail sales model, which on average saves up to $1,000 as compared to traditional used car dealerships.
CarLotz’ contactless end-to-end e-commerce capabilities give buyers the opportunity to transact the way they’re most comfortable: on the internet, over the phone or in-person.
The industry’s only asset-light consignment sales model, with 90% of CarLotz’ vehicles non-competitively sourced and 60% sourced from its corporate vehicle sourcing partners, enables CarLotz to operate without the need for significant capital or capital at risk to support traditionally owned inventory.
CarLotz is the only omni-channel used vehicle business that makes it possible for corporate vehicle sourcing partners to sell their vehicle inventory at retail prices. CarLotz’ proprietary Retail Remarketing technology is fully integrated with those of its corporate vehicle sourcing partners providing an easy and seamless remarketing experience, as well as industry leading reporting, data analytics, pricing information and vehicle triage decision-making.
CarLotz is high-growth, run-rate profitable and cash-flow breakeven.
CarLotz is poised to take advantage of significant near-term growth opportunities anchored on its nationwide expansion plans, increased inventory from existing and new corporate vehicle sourcing partners, cutting-edge technology platforms and increased focus on marketing.
The transaction is priced at a multiple of 0.88X estimated revenue for fiscal 2022 and a multiple of 6.8X estimated gross profit for fiscal 2022, a meaningful discount to CarLotz’ publicly traded peers.
-----
As you can see there, LOTZ trades at LESS THAN 1x times 2022 sales. If this multiple remains accurate, it implies a share price of >$20 in 2022, as 2023 projections put revenue around 1.5 Billion. It's basically unheard of to find a good quality growth company trading this cheap compared to it's projected YoY growth rates. In my opinion, the company will re-rate higher, as people begin to understand the story. In my view, this should be a $80-$100 within 2-3 years. So what's the trade here? Just buy, right?
Well as it turns out, there is an even better way to play this. LOTZW. LOTZW are LOTZ warrants, which expire in 2026 and have a strike price of $11.50. This means that anytime between now and 2026, one warrant entitles you to buy one share of LOTZ for $11.50. Considering that LOTZW trades right now for about $2.50, this means that if you buy LOTZW, your breakeven on the underlying LOTZ stick will be ~$14. While 14 is almost a 60% premium to the current share price, I believe that between now and 2026, this company will be in the triple digit range, which would mean an unbelievable return for these LOTZW warrants. Essentially, we are buying an extremely far out OTM LOTZ call. That's a bet I'm more than happy to take.
Cheers!
ノート
from CarLotz IR:Thank you for your email. Regarding the terms of the warrants, each warrant gives the right to its holder to buy one share of CarLotz at $11.50 for the 5 years after closing (which was Jan 21, 2021). Warrants could be early redeemed by the Company under a number of scenarios (e.g. if share price is above 18/share or if the Company decides to redeem all warrants in exchange for shares) as better described in the prospectus. The warrants become exercisable 30 days following the closing date of the Merger.
All information about the Company securities can be found in the Prospectus: sec.gov/Archives/edgar/data/1759008/000110465920140425/tm2034230-13_424b3.htm. For the warrants, please refer to pages 230-235.
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