Auto1 IPO — Quick Takeaways
There are only a few days left until trading of one of the largest European tech IPOs is expected to commence. Even though Europe’s €20b in 2020 IPO proceeds (as reported by PwC) pale in comparison to the $150b+ in the US, driven by a wave of technology growth stocks going public through special purpose acquisition companies, the significance of Auto1 is high on both sides of the ocean. With an expected total volume of more than €1.5b, it is a major milestone not only for Germany’s startup ecosystem but also for all the participants in the global used car sales market — especially technology players that recently went public, such as Carvana (NYS: CVNA) and Vroom (NAS: VRM).
Background: Auto1 is running a platform for purchasing and selling of used cars. It is operating in Europe and headquartered in Germany. Since its launch in 2012, the business has expanded in a very fragmented space. While the market may seem huge — a €600b 2019 volume is cited by the company — in Europe it is especially difficult to service large parts of it, due to country borders, different languages and legal frameworks. This increases transaction costs and lowers transparency, leading to more incentives for private sellers to seek local merchants or a peer-to-peer transaction, circumventing businesses altogether. This local nature of the market creates supply and demand disparities, often leading to similar products being priced differently in different countries.
Auto1 was set up to solve this market inefficiency and over time the business expanded into an international web of services and activities, depicted by the company in the following chart:
As of the end of 2019 the company was active in 30 European countries, generating around €3.5b of revenue, using more than 400 drop-off and pick-up locations and mostly purchasing its vehicle stock from consumers (87% in the first 3 quarters of 2020 were acquired this way).
It is being positioned in the same way Vroom used to be pitched in it’s IPO roadshow in the beginning of 2020 → e-commerce play, leveraging the low penetration of online sales in used cars at just 1% (Auto1 estimate ). As per Eurostat the online penetration in the combined category of cars, bicycles, mopeds and their spare parts doesn’t exceed 10%:
At the same time, in the first 9 months of 2020, the direct-to-consumer business of Auto1 under the brand “Autohero” represented only around 2% of its overall amount of vehicles sold and around 4% of total revenue, while the bulk was concentrated around selling to merchants (professional dealers).
Takeaway #1/4: Size
Auto1 is a large business — shortly before the pandemic it was doing more revenue than Carvana:
Takeaway #2/4: Pandemic impact on growth
Having only a minor part of its business involved with direct-to-consumer online sales, Auto1’s business with traditional merchants mostly selling offline was hit much more heavily than the one of its US counterparts — it is indeed the last in the list:
Takeaway #3/4: Margins
The category where the company is performing very promisingly is margins — both gross profit and EBIT are well positioned in the benchmark and this is what the business can rely on when markets determine its value:
While the company acknowledges that significant investments in its “Autohero” brand should be expected after the IPO, with a corresponding impact on profitability, Auto 1 is the only business with at least one quarter of positive EBIT margins so far:
Takeaway #4/4: Valuation
Given lower growth and the inherent challenges of the European market, in my opinion it is unlikely that investors will value Auto1 with the same multiples as Carvana (9.6x enterprise value to revenue). Yet, if markets believe the e-commerce story, coupled with Auto1’s EBIT and gross margins and differentiated position on the European used vehicles buy-side competitive landscape, it might land amidst Vroom (3.0x) and Carvana (9.6x). This would mean Auto1’s enterprise value could reach more than $10b, which is beyond the current pricing range of its underwriters ($7–8b).
- The enterprise value to revenue multiples are taken as of pre-market on 1st of Feb 2021, the source is Pitchbook.
- The EUR/USD exchange rate used is 1.21 as of 1st of Feb 2021.
Special thanks to Baris Guzel for providing feedback on the draft.
For questions or further discussion, please feel free to reach out on atanas@bmwiventures.com
