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Posts from the ‘RumbleOn (RMBL)’ Category

Comments on RumbleOn and Liqtech, also Smith-Micro and Vicor

I wrote a couple of lengthy responses in the comment section that I have reproduced here.  One was on RumbleOn (here).  The other was about Liqtech (here).  I also comment on Smith-Micro and Vicor briefly.

Liqtech

1. Isn’t the installation of scrubbers self-defeating if too many ships continue to use HSFO?

A couple points. First, assuming that there is a point where its self defeating to install scrubbers (which I am going to raise a question about in a second) I believe that its far enough away that if it happens Liqtech will have benefited well beyond what is justified by the current share price. Consider that right now we are talking a couple thousand ships getting scrubbers out of a 70k fleet. And my numbers are assuming Liqtech only gets a fraction of those ships (ie. I don’t have the latest framework agreement modeled in there, I don’t have direct to shipowner sales, no sales from the other 4 scrubber manufacturers they are working with). Second, are we sure it would be self-defeating? Consider this – What are current HSFO to LSFO equivalent spreads (you have to use a gasoil equivalent for LSFO because there isn’t a true LSFO right now) and what would be the payback on scrubbers at those spreads? I was looking at this a month ago and thinking that at current spreads (so right now, with all ships still using HSFO) scrubber payback would still be pretty good. Isn’t this the worst case scenario for spreads after 2020? To put it another way, the reason ships aren’t installing scrubbers right isn’t because spreads aren’t favorable, its because they don’t have to.

2. What is a fair multiple for Liqtech given that their growth is concentrated on the next seven years and will massively flatten or even be negative thereafter?

While it’s hard to predict that far out in the future, there are opportunities that could result in significant earnings even after the retrofit opportunity has passed.  First there is the new build opportunity – 60% of new builds are being installed with scrubbers. 1,000-1,500 ships a year get built I believe (I’ve never been able to pin that number down exactly, its always given on a DMT basis, not ship basis) and Liqtech is dealing with 7 of the 10 largest scrubber manufacturers. So the opportunity is quite large.

Second, I think the upside from the ramp could far exceed the current share price on its own. While its tough to project because we don’t know yet whether Liqtech will hold its market share through the build, how many scrubbers will be closed-loop or hybrid, etc, if an optimistic scenario holds then the cash they taken in should exceed the existing share price by quite a bit.

Further off there are other verticals where the exposure from being used in a large number of ships will help give them credibility to expand into – such as scrubbers for power industry, oil and gas flowback filtering, and maybe further inroads into DPFs.

But the main answer i that I think the new build opp is going to be large. The bigger question is what does the regulatory regime look like in 7 years and have even stricter environmental regs come in and how do scrubbers fit into that.  And the other obvious big question is whether there are more hiccups in the implementation of the regulations between now and 2020.

3. Will we see lower revenue because the latest framework agreement is for lower ASP systems?

No, I don’t think that’s right. Consider that the new framework agreement is entirely incremental to my model. You can basically add 80-100 units at $230K and 70% margin (they said higher margin and we know existing units at scale are 65% with the Mark 6 design so 70% is my guess). So I think my numbers actually change pretty dramatically for the better with the new agreement. Also consider that the number in my model (80) is actually less than the other two framework agreements. I conservatively said 80 but if you read the transcripts Liqtech said they expect 120 from these two framework agreements.

4. How likely is another capital raise?

Liqtech came out last week and said they don’t need to raise capital this week. They said they had more cash then they had at the end of the second quarter. And soon they are going to be getting a tonne of cash from orders. I agree $4 million doesn’t seem like a lot but given their comments it would definitely be a surprise to me if they raised at this point.

What I think of the IMO 2020 meetings

This wasn’t a question but I had commented last weekend about IMO 2020 here.   This is obviously the big weight on the share price.  I think the upside based on what can happen is a pretty clear picture.  It’s what will happen that was thrown a curveball when the US threw its hat in the ring leading up to the MEPC meetings.  But since that time the IMO approved the fuel carriage ban and basically told the flag states that if you want us to consider a proposal for a more gradual approach we want to see more details.  So the result was constructive for Liqtech.

The risk remains, but in my opinion the risk specific to Liqtech falls as time passes.   The implementation of the fuel carriage ban was the last step for enforcement and that was passed.  The rebuke of the flag state proposal says to me that the IMO wants any proposal to clearly state that they are asking only for waivers when compliant fuel is not available and not looking to delay enforcement generally.  While the clarification comment that the flag states made leading up to the meetings (which I mentioned in my previous comment) said as much, the actual proposal being voted on last week (which was what the flag states wrote at the end of August and had been interpreted by some as “an attempted coup”) sounded like it was more vague.  I don’t think the IMO wants to implement a vague proposal that might open other doors.  So they closed the door on that.

At this point the IMO meets next May.  That meeting might have a clearer proposal for waivers on the table but I think it’s less likely that some sweeping change comes out of the blue and derails the whole thing.   Barring an unforeseen event in the interim, shipowners are going to have to move forward with what they know.  I think this means scrubber purchases move ahead.

RumbleOn

I was also asked what I thought of the Wholesale acquisition by RumbleOn.

I was initially skeptical about the deal.  RumbleOn’s third quarter numbers, on the surface, weren’t very good. The reulsts matched what I had suspected when I was watching inventory on a daily basis – in September the numbers flattened out/turned down.   As a consequence they missed the unit number. I was surprised that ASP was down too. So when I saw the acquisition my first reaction was: hmmm, are they just trying to paper over a bad quarter and slipping growth?

But since then I’ve listened to the conference call a few times, read through all the documentation and I’m coming around to the deal.  The quarter was still not very good though.

Let’s talk about the quarter first.

While the third quarter results and guide are disappointing I’m not sure that they are as bad as they appear at first glance.  If you take management at their word, they changed their acceptance criteria for making cash offers, basically limiting offers to cases where they thought they could make at least $1,000/bike. Their “terminated” offers (meaning offers that they didn’t decide to make after the seller went through the trouble) went up from 2% to 15%, which is a big increase.  They said this resulted in a 700 bike slip in inventory.  That slowed unit sales, which is what I saw on the site myself.

Now you can believe them or not here.  Maybe this is an excuse and the business just slowed.  But what I have seen on the site is consistent with higher margin bikes being available.  They said that their ASP has been much higher in Q4 (anecdotally I saw that too at the end of quarter – that ASP of inventory has definitely gone up).

Maybe the bigger negative about the quarter is that the SG&A as a percentage of revenue did not come down.  It was up a little from the second quarter.  I had been hoping it would come down soon as the company moved towards profitability.  But this didn’t happen, which is a negative.

When I look at the Wholesale acquisition, I understand why the market was lukewarm to it. Wholesale gross margins are tiny, like 4.3%, so even with the volumes (they are expected to sell 2,000 cars a month next year) and even growing 15-20% that’s tough. Carvana has double the margins and the story there is margin expansion as they layer on services. But Wholesale can’t really layer on services because they are selling wholesale, not to consumers.

Therefore on the surface the acquisition kind of looks not that great.  What you can say is that it wasn’t expensive (as one analyst on the call pointed out they are getting the business at 12x income and asked why the owners would sell so low).

So that was my first take.  But I’m more constructive as I’ve thought about it some more. Here’s how I’m thinking about it now:

How much would it take RumbleOn to create a platform and distribution network to populate their new car and truck online portal with 2,000 vehicles available to consumers from the go, ramp their sales to dealer/auction up to 20,000 per quarter (which is the current Wholesale run rate), building out that network in the process, and build a distribution network to manage the supply chain? I don’t know that number but I think its higher than $23 million.

For $23 million they get immediate inventory that can go to the soon-to-be launched consumer facing site, they get a built and operating distribution network for deliveries and dealer network, and they get to layer on their consumer cash offer business.  And yes they also get the dealer purchasing vertical that Wholesale excels at as well as a couple of retail locations.

Yes margins at Wholesale are really low, but it’s because they buy from dealers, refurbish and sell to auction/dealer. Wholesale seems to me to be essentially an arbiter.  But I don’t think RumbleOn bought Wholesale because they were enamored with this dealer to dealer business.

To put it another way, Wholesale also has an existing network and inventory that can be leveraged to more quickly build the higher margin consumer purchases and higher margin consumer sales that RumbleOn has always planned.  RumbleOn has the automated cash offer system to drive consumer purchases which will be better margins. They have their site/app/brand to drive consumer sales.

I think that looking at Wholesale’s business as-is or trying to think about how RumbleOn will improve Wholesale’s existing business is probably not paramount to how Chesrown and Berrard are thinking about it – yes, RumbleOn should be able to make incremental improvements on what Wholesale does through data analysis that improve decisions but that’s not the primary motive for the acqusition – the point is layering on the consumer online buy side with the cash offer model and consumer sales through the website, and leveraging Wholesale’s existing dealer network to maximize turns right from the start. Improvements to Wholesale’s existing business are peripheral to what they are really going for here in my opinion.

They said it multiple times on the call – RumbleOn is creating a supply side solution – they are demand side agnostic – consumer/dealer/auction – whatever. They need to be able to access each vertical and the more they can sell to consumer the better but unlike Carvana, Vroom, et al the focus is not sales to consumers. Its closer to the other way around – the focus is buying from consumers. They will sell whereever they can sell fastest to maximize turns. It’s the buy side that matter, procuring as much inventory from as possible from consumers while insuring it’s the right vehicle at the right price. If they get the buy side right the sell side sorts itself out. Wholesale fits nicely into this IMO.

So I like the acquisition. But I also think the logic behind it is complicated and I’m not totally sure the market will agree with me right away. I also think the quarter was not so good and you have to buy into management’s explanation to be okay with the results.  So we may get more pain. Nevertheless, I did buy back a position on Friday.

A couple other things

I bought back Smith-Micro after the earnings report.  I had said in my update that I was worried they would miss estimates.   They did, kind of. I could have sworn the Roth estimate (the only analyst) was $6.7 million of revenue for the quarter.  The company came in at $6.5 million. But when I looked after earnings it appears the estimate was actually $6.1 million.  So I don’t know if I imagined that $6.7 million number or whether Roth changed it at the last minute.

For what its worth it means they beat, but the stock fell anyway.  I didn’t think it was a bad quarter at all though.  Safe & Found adoption at Sprint continues at a steady pace, there are overtures of a second carrier in the next 6-9 months, and it appears that the sunset of the legacy product used by Sprint customers is coming.  These are all positives and really the only negative had to do with the peripheral Graphics business, which saw a steep revenue decline but is now at the point where it can’t hurt the company going forward.  So I bought.

Vicor stock action remains a gong-show.  I’m holding on (pretty much HODL at this point) and I did think their quarter was fine.  There is weakness in the legacy business but the new products bookings were up 20% sequentially, which is a great number.  Apparently there is a negative report or article on Vicor that has been out for a while that could be the basis for some short selling of the stock.  John Dillon mentioned it on SeekingAlpha.  If anyone has the report I’d really appreciate seeing it.

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Week 279: Cautious on trade(s)

Portfolio Performance

Thoughts and Review

I haven’t written a post since my last portfolio update.  Up until this last week I did not add a new stock to my portfolio.  I have sold some stocks though.  Quite a few stocks really.

I have been cautious all year and this has been painful to my portfolio.  While the market has risen my portfolio has lagged.  I have lagged even more in my actual portfolio, where I have had index shorts on to hedge my position and those have done miserably until the last couple of weeks.  In fact these last couple of weeks  are the first in some time where I actually did better than the market.

My concerns this year have been about two headwinds.  Quantitative tightening and trade.

Maybe its being a Canadian that has made me particularly nervous about the consequences of Trump’s protectionism.  With NAFTA resolved I don’t have to worry as much about the local consequences.  But I still worry about how the broad protectionist agenda will evolve.

I continue to think that the trade war between the United States and China will not resolve itself without more pain.  The US leadership does not strike me as one open to compromise.  Consider the following observations:

Peter Navarro has written 3 books about China.  One is called “Death by China”, another is called “Crouching Tiger: What China’s Militarism Means for the World” and the third is called “The Coming China Wars”.

In the Amazon description of Death by China it says: “China’s emboldened military is racing towards head-on confrontation with the U.S”.  In the later book, Crouching Tiger, the description says  “the book stresses the importance of maintaining US military strength and preparedness and strengthening alliances, while warning against a complacent optimism that relies on economic engagement, negotiations, and nuclear deterrence to ensure peace.”.  The Coming China Wars, his earliest book (written in 2008), notes “China’s dramatic military expansion and the rising threat of a “hot war”.

Here’s another example.  Mike Pence spoke about China relations last week at the Hudson Institute.  Listening to the speech, it appeared to me to be much more about military advances and the military threat that China poses than about trade.  The trade issues are discussed in the context of how they have led to China’s rise, with particular emphasis on their military expansion.

John Bolton’s comments on China are always among the most hawkish.  Most recently he spoke about China on a radio talk show.  Trade was part of what he said, but he focused as much if not more on the Chinese behavior in the South China Sea and how the time is now to stand up to them along those borders.

Honestly when I listen to the rhetoric I have to wonder: Are we sure this is actually about trade?

Is it any coincidence that what the US is asking for is somewhat vague?  Reduce the trade deficit. Open up Chinese markets. Less forced technology transfer (ie. theft). Now currency devaluation is part of the discussion.

I hope that this is just a ramp up in rhetoric like what we saw with Canada and Mexico.  That the US is trying to assert a negotiating position before going to the table and reaching some sort of benign arrangement.  But I’m not convinced that’s all that is going on.

If this has more to do with pushing China to the brink, then that’s not going to be good for stocks.

I can’t see China backing down.

From what I’ve read China can’t possibly reduce the trade deficit by $200 billion as the US wants without creating a major disruption in their economy.   Never mind the credibility they would lose in the face of their own population.

Meanwhile quantitative tightening continues, which is a whole other subject that gives me even more pause for concern, especially among the tiny little liquidity driven micro-caps that I like to invest in.

I hope this all ends well.  But I just don’t like how this feels to me.  I don’t want to own too many stocks right now.  And I’m not just saying that because of last week.  I have been positioned conservatively for months.  It’s hurt my performance.  But I don’t feel comfortable changing tact here.

Here’s what I sold, a few comments on what I’ve held, and a mention of the two stocks I bought.

What I sold

I don’t know if I would have sold RumbleOn if I hadn’t been so concerned about the market.  I still think that in the medium term the stock does well.  But it was $10+, having already shown the propensity to dip dramatically and suddenly (it had fallen from $10 to $8 in September once already), and having noted that Carvana had already rolled over in early September, I decided to bail at least for the time being.  Finally there was site inventory turnover, which if you watch daily appeared to have slowed since mid-September.  Add all those things up and it just didn’t feel like something I wanted to hold through earnings.

I was late selling Precision Therapeutics because I was on vacation and didn’t actually read the 10-Q until mid-September.  That cost me about 20% on the stock.  I wrote a little about this in the comment section but here is what has happened in my opinion.  On August 14th the company filed its 10-Q.  In the 10-Q on page 14 it appears to me to say that note conversion of the Helomics debt will result in 23.7 million shares of Precision stock being issued.  This is pretty different than the June 28th press release, where it said that the $7.6 million in Helomics promissory notes would be exchanged with $1 shares.  Coincidentally (or not) the stock began to sell off since pretty much that day.

Now I don’t know if I’m just not reading the 10-Q right.  Maybe I don’t understand the language.  But this spooked me.  It didn’t help that I emailed both IR and Carl Schwartz directly and never heard back.  So I decided that A. I don’t know what is going here, B. the terms seemed to have changed and C. it’s not for the better. So I’m out.

I decided to sell R1 RCM after digging back into the financial model.  I came to the conclusion that this is just not a stock I want to hold through a market downturn.   You have to remember there is a lot of convertible stock because of the deal they made with Ascension.  After you account for the conversion of the convertible debt and all the warrants outstanding there are about 250 million shares outstanding.   At $9.30, where I sold it, that means the EV is about $2.33 billion.  When I ran the numbers on their 2020 forecast, assuming $1.25 billion of revenue, 25% gross margins, $100 million SG&A, which is all pretty optimistic, I see EBITDA of $270 million.  Their own forecast was $225 – $250 million of EBITDA.  That means the stock trades at about 9x EV/EBITDA.  That’s not super expensive, but its also not the cheapie it was when I liked the stock at $3 or $4.  I have always had some reservations about whether they can actually realize the numbers they are projecting – after all this is a business where they first have to win the business from the hospitals (which they have been very successful at over the last year or so) but then they have to actually turn around the expenses and revenue management at the hospital well enough to be able to make money on it.  They weren’t completely-successful at doing that in their prior incarnation.  Anyways, I didn’t like the risk, especially in this market so I sold.  Note that this is an example of me forgetting to sell a stock in my online tracking portfolio so it still shows that I am holding it in the position list below. I dumped it this week (unfortunately at a lower price!).

I already talked a bit about my struggle and then sale of Aehr Test Systems in the comment section.   I didn’t want to be long the stock going into the fourth quarter report.  Aehr is pretty transparent.  They press release all their big deals.  That they hadn’t announced much from July to September and that made it reasonably likely that the quarter would be bad.  It was and the stock felll.  Now it’s come back.  It was actually kind of tempting under $2 but buying semi-equipment in this market makes me a bit nervous so I didn’t bite.  Take a look at Ichor and how awful this stock has been.  Aehr is a bit different because they are new technology that really isn’t entrenched enough to be in the cycle yet.  Nevertheless if they don’t see some orders its not the kind of market that will give them the benefit of the doubt.

BlueLinx. I don’t have a lot to say here. I’m not really sure what I was thinking when I bought this stock in the first place.  Owning a building product distributor when it looks like the housing market is rolling over was not one of my finer moments.  I sold in late August, then decided to buy it in late September for “an oversold bounce”.  Famous last words and I lost a few dollars more.  I’m out again, this time for good.

When I bought Overstock back in July I knew I was going to A. keep the position very small and B. have it on a very short leash.  I stuck with it when it broke $30 but when it got down to $28 I wasn’t going to hang around.  Look, the thing here is that who really knows?  Maybe its on the verge of something great? Maybe its a big hoax?  Who knows?  More than anything else what I liked when I bought it was that it was on the lower end of what was being priced in and the investment from GSR showed some confidence. But with nothing really tangible since then it’s hard to argue with crappy price action in a market that I thought was going to get crappier.  So I took my loss and sold.

Thus ends my long and tumultuous relationship with Radcom.  I had sold some Radcom in mid-August before my last update primarily because I didn’t like that the stock could never seem to move up and also because I was worried about the second quarter comments and what would happen to the AT&T contract in 2019.  I kept the rest but I wish I would have sold it all.  In retrospect the stocks behavior was the biggest warning sign.  The fact that it couldn’t rise while all cloud/SAAS/networking stocks were having a great time of it was the canary in the coal mine.  As soon as the company announced that they were seeing order deferral I sold the rest.  I was really quite lucky that for some reason the stock actually went back up above $13 after the news (having fallen some $4-$5 the day before mind you), which let me get out with a somewhat smaller loss.  The lesson here is that network equipment providers to telcos are crummy stocks to own.

Finally, I sold Smith Micro.  This is a second example where I actually didn’t sell this in the online portfolio until Monday because I didn’t realize I had forgotten to sell it until I put together the portfolio update.  But it’s gone now.  I wrote a little about this one in the comment section as well.  The thing that has nagged me is that the second quarter results weren’t really driven by the Safe & Found app.  It was the other products that drove things.  That worries me.  Again if it wasn’t such a crappy market I’d be more inclined to hold this into earnings and see what they have to say.  They could blow everyone away.  The stock has actually held up pretty well, which might be saying that.  Anyways I’ll wait till the quarter and if it looks super rosy I’ll consider getting back in even if it is at a higher price.

What I held

So I wrote this update Monday and Vicor was supposed to report Thursday.  Vicor surprised me (and the market I think) by reporting last night.  I’m not going to re-write this, so consider these comments in light of the earnings release.

One stock I want to talk about here is Vicor, which I actually added to in the last few weeks.  Vicor has just been terrible since late August.  The stock is down 40%.  I had a lot of gains wiped out.  Nevertheless this is one I’m holding onto.

I listened to the second quarter conference call a couple of more times.  It was really quite bullish.  In this note from Stifel they mention that Intel Xeon processor shipments were up significantly in the first 4 weeks of the third quarter compared to the second quarter.  They also mention automotive, AI, cloud data centers and edge computing as secular trends that are babies being thrown out with the bath.  These are the areas where Vicor is growing right now (Vicor described their core areas on the last call as being: “AI applications including cloud computing, autonomous driving, 5G mobility, and robots”).

Vicor just started shipping their MCM solutions for power on package applications with high ampere GPUs in the second quarter.  They had record volume for some of their 48V to point of load products that go to 48V data center build outs and a broader acceptance by data center players to embrace a 48V data center.  There’s an emerging area of AC-DC conversion from an AC source to a 48V bus.  John Dillon, who is a bit of a guru on Vicor, wrote a SeekingAlpha piece on them today.

I know the stock isn’t particularly cheap on backward looking measures.  But its not that expensive if the recent growth can be extrapolated.  I’m on the mind it can.   Vicor reports on Thursday.  So I’ll know soon enough.

The second stock I added to was Liqtech.  I’ve done a lot of work on the IMO 2020 regulation change and I think Liqtech is extremely well positioned for it.  When the company announced that they had secured a framework agreement with another large scrubber manufacturers and the stock subsequently sold off to the $1.50s, I added to my position.

I’m confident that the new agreement they signed was with Wartsila.  Apart from Wartsila being the largest scrubber manufacturer, what makes this agreement particularly bullish is that Wartsila makes its own centrifuges.  Centrifuges are the competition to Liqtech’s silicon carbide filter.  If Wartsila is willing to hitch their wagon to Liqtech, it tells me that CEO Sune Matheson is not just tooting his horn when he says that Liqtech has the superior product.  I’ve already gone through the numbers of what the potential is for Liqtech in this post.  The deal with Wartsila only makes it more likely that they hit or even exceed these expectations.

Last Thought

I took tiny positions in three stocks.  One is a small electric motor and compressor manufacturer called UQM Technologies.  The second is a shipping company called Grindrod (there is a SeekingAlpha article on them here).  The third is Advantage Oil and Gas.  All of these positions are extremely small (<1%). If I decide to stick with any of them I will write more details later.

Portfolio Composition

Click here for the last seven weeks of trades.

Week 366: The Wishy Washy Portfolio

Portfolio Performance

Thoughts and Review

I’ve done a lot of flip-flopping over the last 6 weeks.  I couldn’t get comfortable with certain oil producers, I couldn’t get comfortable with oil servicers and I couldn’t get comfortable with the copper stocks.  I also owned and then sold Cameco and Energy Fuels before settling on buying the debentures for Energy Fuels.

These transactions weren’t trades.  I don’t really trade in my portfolio.  But I often buy into ideas that I am not completely committed to.  Having a position clarifies my conviction.  If I don’t have it, I’ll sell a few days later.

As it turns out it probably wasn’t a bad idea to step away from these ideas.  The oil servicers, which I will talk about below, have done little.  Copper stocks, which I talked about here, have done even worse.    Cameco has floundered.

What I have added and stuck with over the last 6 weeks is RumbleOn and Smith Micro, both of which I have already talked about, GeoPark, which I’ll talk about another time, and Overstock, which I’ll talk about right now.

Overstock

When I first wrote about blockchain I said I found it interesting because: “it’s a way of dis-embodying trust into technology. The middle man disappears. The skim shrinks. Everyone (other then the middle man) benefits.”

Since that time crypto has gone to the moon and crashed again.  While its easiest to base an opinion on the latest bitcoin price, I don’t think that is necessarily correct.  I still think the premise of what blockchain promises has value.  It just has to find ways of being integrated into applications that have broad usage. If I were to bet, I would say that the current lull in sentiment will pass and that blockchain will come back into vogue in some new form relatively soon.

So let’s talk about Overstock.

I bought the stock two weeks ago after tZero announced that they had received a $100 million letter of intent (LOI) from GSR Capital.

Like most things with Overstock, its a fuzzy data point.  First, its an LOI, which doesn’t really mean anything is certain.  Juniors on the Canadian venture exchange love to use LOI’s to put out big numbers and generate big hype (coincidentally I will talk about a situation like that shortly!).  The deals often don’t amount to anything.

Second, GSR Capital looks a bit sketchy.  This post from CoBH kind of makes that point.  Of course you can dig in the other direction and find less bearish takes on what GSR is doing.

I’ve always thought of Overstock as a stock that has an asset value with a huge standard deviation.   You can create a legitimate case that the stock is worth $30 or $80. There is that much uncertainty about outcomes.

It’s all about buying it at the right place within that band.

Being able to buy the stock in the low $30’s (I got a little at $31, more at $32 and the rest at $33), especially after there was incrementally positive news, seemed like a reasonable proposition to me.

The GSR investment, if it is followed through, represents the first time in a while that something Byrnes has hinted at actually happened.  So I’m getting it at the bottom of the band and with a positive data point to boot.

When I sold Overstock in January and February it was because the projections Byrne had made a quarter before were not coming to fruition.

  • He had said the stock lending platform had billions of inventory and would start making money shortly.   But in the tZero disclosures in December there was no mention of the stock platform at all!
  • He had talked about partners knocking at the door.  But all that materialized was Siebert and a couple of other tiny acquisitions.
  • He talked about the mysterious man in the room and one other big opportunity he had.  This turned out to be De Soto, a very interesting idea but something that he himself has said that he only “thinks” can make money.

Byrne also talked at length about the Asian money that was interested in tZero.  That was another strike out.  Until the GSR investment.  Now its not. So something actually panned out.

Its clear that the advanced state of tZero that was described at the end of last year was exaggerated.  It also seems likely to me that Byrne was not entirely aware of the state of the software.  Witness that the CEO of tZERO was replaced by Saum Noursalehi, who was moved over there to add a “Silicon Valley” mindset to tZero:

But I think this is going to become an innovation game. I think that by putting Saum there, I mean he’s extraordinarily able as an executive anyway, but in terms of managing innovation, Saum and I have a decade’s history of working together on [O lab] And other things that have changed our company and I don’t think anyone I’ve met in New York was going to be able to compete with what I know Saum has in mind.

tZero was supposed to offer a stock lending platform and would be on-loading inventory they had accumulated. That didn’t happen and they are now in the business of licensing it out.  The software also probably wasn’t all that functional; on the first quarter call Noursalehi said they were (only now) building out the functionality to allow you to carry the digital locate receipts for intra-day periods.  That this wasn’t available in the original software is odd.

They are also only in the process of building out the token lending platform, which is to say there is nothing operational yet (one of the first major red flag I mentioned from the tZERO memorandum last December was that the security token trading system was described as something that still needed to be built!).

Of course the sale of the e-commerce platform, which was supposed to be done by February-March, is ongoing and now more of a “souffle”.

So there are lots of negative spins you can make here.  On the other hand they are forging ahead with the tZero platforms, they have over $250 million of cash on the balance sheet and another $320 million from the tZero token offering (if you count GSR and all the executed SAFEs), and the sale of e-comm is still ongoing, so there is the potential for a positive resolution there.

There is also the initiatives to transform e-comm into something that is growing.  While these are still in the early stages it seems to be working.  So that’s just another probability to add to the list.

Most importantly, at a little over $30 buck a lot less of the positive potential is priced into the stock then at $80.

Look, Overstock is what it is: a stock with a lot of optionality, a lot of uncertainty, operating in an brand new industry that I don’t think any of us know how it will play out in the next 5 years.

So speculators pretend that the price of bitcoin is somehow a proxy for the state of blockchain. It’s probably not.  I didn’t buy Overstock as a quick trade to capture a short pop on speculation of GSR.  I actually think at $33 it represented a fair value for all the risks and rewards.  So I’ll see wait for the next data point how and evaluate from there.

Wanting to Buy Oil Services but can’t

I’m not a trader.   When I get into a stock its with the intent of sticking with it for 6, 12 or 18 months or however long I need to in order for the idea to play out.

So when you see me in and out of a stock in a short time frame it usually has nothing to do with trading.  Its just indecision.

Such has been the case with the oil services stocks where I’ve been in, out, back in and back out again.

What’s going on?  I’m being torn between two sides.

The bull side is simply this: oil is up, growth in production needs to come from the US, and oil servicers should benefit.  The stocks are extremely cheap if their businesses are on a growth path.

The bear side is that all of the on-shore servicers are exposed to the Permian, Permian capacity constraints are going to kick in this summer, and volume and pricing of drilling and completion services are going to get squeezed.

I should probably just walk away from the idea.  The stocks don’t act well.  Considering that this should be a bull market, the action is even worse.

What keeps me interested is just the absolute valuations.  Below are 5 companies with average EBITDA multiples for 2018 and 2019 (these prices are from a week or so ago but I don’t think anything has moved much since then so I haven’t updated them).

Seems cheap?  That’s what I thought.

But when I buy any of these stocks, all I do is fret about them.

The problem is the Permian.  RBN put out a really good piece describing how the infrastructure bottleneck in the Permian is likely to play out, and what the alternatives now.  Unfortunately it’s behind a pay wall.

The issue is that there isn’t enough pipeline capacity to get the oil out and new pipeline capacity won’t be finished until the second half of next year.  So you have about a year of constrained takeaway.

Source: PLG Consulting

As RBN pointed out the alternatives to pipelines have their own constraints.  Rail can only carry as much as the available tankers and loading capacity.  This is less than 100 thousand barrels a day.

Trucking is theoretically unlimited but the logistics of bringing in trucks and truckers caps it in reality.  A single truck can carry about 180 barrels a day.  So for every 10,000 barrels a day of production you need to add 100 to 150 trucks and drivers.

The Permian accounts for about 50% of activity in the United States onshore.  As an oil servicing business its hard to avoid the Permian.  Exposure of the companies I’ve looked at varies from 30-60%.  Solaris has about 60% of their fleet in the Permian.

But just how much of a hit will these companies take?  That is the other big question.

According to the company’s themselves, they are insulated.  They talk up their long-term contracts, how they are dealing with the stronger operators in the region, and how these operators have secured takeaway capacity and hedged their exposure and thus will be able to keep drilling.

But are they really?  I don’t trust them.  We won’t really know until the second quarter calls start hitting and they have to fess up about the state of their operation.

So what do you do?

For now I’m back out.  I think.

The only exceptions are a couple of non-Permian related servicers that I own.  Cathedral Energy, which I don’t believe has as much exposure to the Permian (though they do have some), and Energy Services of America, which is a pipeline builder in the Marcellus/Utica that has a host of their own problems but the Permian is not one of them.

RumbleOn

I was worried that my lead touch was failing me.  I am resigned to the fact that I take positions in stocks where I will have to endure months of it  doing nothing or going down before it actually begins to move as I suspect it should.

RumbleOn moved as soon as I bought it and before I was even able to get a write-up out.

<sarcasm>Fortunately</sarcasm>, that situation was rectified as the company offered a little over 2 million shares at $6.05.

In retrospect, the entire move to the mid-$7’s and back to $6 was probably bogus.  I don’t understand all the in’s and out’s of these share offerings enough to be able to tell you why, but I’ve been held hostage to enough of them to know that this sort of activity seems to be part of the process.

So what do I think of the move to raise cash?  I don’t see it as a big deal either way.  I had thought they might use their recently created credit facility to bridge the gap to profitability.  I figured given the management holdings they’d be reluctant to dilute.  But whatever.  If the business works the 2 million shares is not going to matter much to where the price goes.

I used the opportunity to add more.

Mission Ready

I have been patiently waiting for 9 months for something to happen with Mission Ready. I haven’t said much (anything?) about the company since I wrote about them last September.  That is because essentially nothing has happened.

Nine months with no news (after announcing a massive LOI) is pretty ridiculous.  There is a valid argument that I should have walked away.  But something about the company made me think its more than just a hyped up press release with nothing behind it.  For sure, the stock price has held up incredibly well since September considering that nothing has happened.   So I have stuck it out.

Now maybe we get some news?  The stock is halted.

Is this the big one?  And is the big one a rocket or a bomb?  No idea.  But I am excited to find out.

Gold Stocks

Back in May when I last talked about the gold stocks I own I wrote:

…these stocks are more of a play on sentiment. I think all I really need on the commodity side is for gold not to crash.

I should have knocked on wood.

That said, the gold stocks I own have held up pretty well.  Wesdome is up a lot.  Gran Colombia is up a little (albeit it was up a lot and has given back most of those gains).  Roxgold is roughly flat, as is Golden Star.  Jaguar Mining is down a bit.  Overall I’m up even as the price of gold is down over $100.

I still like all of these names.  But whereas my original thesis on each name was based on the micro – I simply thought each stock was cheap given its cash flow and exploration prospects, I am actually getting more bullish on the macro.  Even as gold has fallen.

This tariff thing is becoming the shit show I thought it would be.  I expect further escalation before any agreement.

There are a lot of US based commentators that think other countries will be rational and give in to their demands.  I really don’t buy that.  I think its got to get worse before that happens.

I’m Canadian.  So I am on the other side of the tariffs being introduced.  My visceral reaction when I hear of a new tariff being introduced against Canada or I hear Trump make some inaccurate or at least unbalanced comment about Canadian subsidies, is “screw them – I would rather go into a recession than give in to that BS”.

Now you might say that is an irrational response, that it is not reasonable, and point out all the reasons it is wrong.  Sure is.  Doesn’t matter.

If that’s my response, I bet that is also the response of a lot of other Canadians, and of a lot of other citizens of other countries.  We would rather see our government’s stand up for us then be pushed around.

You don’t think that all the other foreign leaders don’t realize that?  Look at what Harper just said: that Trudeau is manipulating the NAFTA negotiations because he can gain political points.  Maybe, maybe not.  It wouldn’t be that surprising.  Does Trudeau get more votes next year if he can say he stood up for Canadians or if he says he buckled under because it was the right thing to do?  You think the European leaders look stronger if they give into US demands?  Same thing for China.

My point is we are all going to stand up for ourselves.  It won’t be until we all see (including the US) what it feels like to be sinking in the boat that we reconsider.  Right now this is a matter of principle and what is rational is irrelevant.

I expect the trade war to escalate.  And gold to eventually start going up.

DropCar, Sonoma

I sold out of both DropCar and Sonoma Pharmaceuticals.

DropCar has been a disaster. When I wrote the stock up I said it was highly speculative, even for me.  But I have to admit I didn’t expect it to crash and burn so quickly.

I don’t like selling a stock just because its just dropping.  If there is a negative data point that comes out, then sure I’ll dump it in a heart beat.  But random drops are frustrating and I often will hold through them.

But the DropCar collapse was too much and I reduced my position in April.  That turned out to be a good idea.  I sold the rest of the stock after the first quarter conference call.  It was just such a bad call.

During the Q&A they were asked about gross margins.  They could have provided a long-term speculative answer, talking about how margins are being pressured because of their growth and the drivers they are hiring, and how long term they expect margins to settle in the mid-teens or low twenties.

They didn’t have to be specific, they just had to spin it positively.  Instead they basically deferred the question.  We aren’t going to talk about that.  You can maybe get away with that answer when things are going well, but when you just announced a negative gross margin quarter you just can’t.

Anyways, I sold.

The other stock I sold was Sonoma Pharmaceuticals.  Sonoma had what was just a really bad quarter.   Sonoma had been growing consistently for a number of quarters and much of my thesis here was simply a continuation of that trend.  That didn’t happen.

The problem is if they don’t grow they are going to have to raise cash again.  They have a limited run way.  The company kind of implied on the call that this was a blip, but it wasn’t enough to convince me with certainty.  So I figured I better sell and wait to see what the next quarter brings.  If they are back on track, I will add it back.  There is still a lot I like about the story.

Portfolio Composition

Click here for the last six weeks of trades.  Note that I added Energy Fuel stock to the practice portfolio because I couldn’t add the debentures (a limitation of using the RBC practice portfolio).  Also note that Atlantic Coast Financial was taken over and my shares converted but this didn’t happen in the practice portfolio (they just stay halted in the RBC practice portfolio).  That’s another change I will have to manually make before the next update.

New Position in RumbleOn: Selling Used Motorcycles Online

I wish I had finished this write-up a day early.  I do not like writing up a stock that just went up 15%.  But that’s where we are with RumbleOn.  I’ve been working on the research and writing all week and then the stock goes parabolic today.  I see no news to speak of.  Anyways it is what it is, and like all my ideas I’m in this for the long term (insofar as the thesis holds up).  Having said that, buying a stock up 15% the previous day is generally not a great idea.

I got the idea a month or so ago from a search of stocks at their 3-month high.   When I’m bored and looking for ideas I will go to the 52-week highs or 3-month highs or some other simple price movement screen that gives a signal of strength and I’ll dig into some of the names.

I’ll look for a name that I haven’t heard of, usually keying on one that is small, and I’ll do a bit of work to see if its worth a closer look.

Anyways that’s how I found RumbleOn.

What was fortunate about the timing was that I had just been looking at Carvana.  Carvana operates an online used car business that is similar to what RumbleOn does for motorbikes.   When I looked at Carvana I couldn’t believe how expensive it was.  When I looked at RumbleOn, I couldn’t believe how cheap it appeared in comparison.

Having dug into it further I’m still of that mind.  In fact it seems to me that RumbleOn has a better business model than Carvana.  I’ll give that comparison in a bit, but first let me describe what RumbleOn does.

An Online Motorcycle Marketplace

RumbleOn operates an online marketplace for buying and selling used motorcycles.  They have a website (rumbleon.com) as well as an iOS and GooglePlay app.

The company makes cash offers for bikes to individuals looking to sell.  If accepted, the bike is shipped to one of their regional partners (dealers), inspected and reconditioned and then put up for sale on the site.

Anyone can sell their bike to RumbleOn.  Upload the vehicle info, fill out a form, add a few pictures and RumbleOn will make you a no-haggle offer.  Its good for 3 days and you either take it or leave it.

It’s meant to be the opposite of going to a dealer or selling the bike yourself.  There is no haggle, no pressure tactics, and you won’t deal with tire-kickers or nitpickers.

For a while RumbleOn also bought bikes through auction and had dealer inventory on their site.  However they’ve stopped both as their retail acquisition channel has become self sufficient.   They do buy bikes via some auto-dealers that take them on trade but don’t have a marketplace and just want to get rid of them.

Early on the goal was to insure that the site had adequate inventory.  So the company reached for it from other channels.  They are now focused entirely on generating inventory through consumers.

Buying a bike on RumbleOn is geared to be just as simple.   Pick a bike from the available selection and put down a $250 deposit.  The full price of the bike is paid in cash or financed through an unaffiliated bank or credit union partner shortly after.

Unlike most of the online used car dealers (like Carvana), RumbleOn is agnostic to who they sell the bikes to.  Most of the car selling sites are focused on the consumer channel.

RumbleOn does that, but they also sell to dealer and auction channels.  At the moment dealers are most of the business (via online and through auction).  They made up 91% of sales in the first quarter while consumers made up just 9%.

The company expects to build out the consumer channel as awareness of the brand grows.  This is a new business, a little over a year old.  Marketing of the app and website should grow the percentage of sales coming from consumers.   I expect all the channels will grow but that consumer sales will grow the fastest.

Margins on consumer sales are higher so they are the preferred customer.  With a dealer sale RumbleOn has to share the margin.

In the first quarter dealer sales had an average selling price of $8,874 at a 7.8% margin while consumer sales had a $12,207 selling price and 13.7% margin.

Gaining Traction with Consumers

The website and app are only about a year old.  Consumer momentum takes time.  AppAnnie and Alexa show that both the website and the app are growing in popularity.

AppAnnie Ranking

Alexa Traffic Rank

Bringing retail owners and buyers to the site is all about experience.  RumbleOn needs to make the experience, both for buying and selling a bike, as painless as possible.

Buying or selling a bike is not a lot of fun.  The alternatives to RumbleOn are selling your bike yourself or selling to a dealer.  If you sell yourself then you will inevitably “suffer the tirekickers and hagglers and deal with shaky payments”, in the words of one Harley rider commenting on a forum about the service.  Selling to dealer likely means haggling, waiting onconsignment or a lower price than what RumbleOn can offer.  Buying a bike offers the same problems in reverse.

What RumbleOn has to do is make the experience so effortless that its worth your while to give up a little margin.

It’s a trade-off to bike enthusiasts.  Reading the reviews of RumbleOn and reading through forums where bike riders talk about buying and selling their bikes, its something that potential bike sellers are very aware off.

The most common complaint you hear about RumbleOn is that their offers are too low.  But most bike owners also understand what they are getting in return for the margin they lose (which amounts to maybe $1,000).  They get guaranteed cash and no hassle.  They do not have to live for weeks or months with strangers coming over to their garage, trying to push a lower on price, and dissing their bike on minor issues.  They also recognize that the offer price is usually better than what they’d get from a dealer.

Sales Growth

So far the model is working.  Bike sales went from 355 in the fourth quarter of last year to 878 in the first quarter.  The company said they expected that to double again in the second quarter.

I was a bit worried about how they could double sales when the website/app bike inventory seemed to be stagnating.  At the end of the first quarter inventory was a little above 1,000 units, whereas now it is slightly below that number.

But it turns out this isn’t the case.   Inventory has been rising.  The appearance of stagnant inventory is because of the removal of dealer listings.

Adding Bikes

If you go back to the first quarter call management was asked about the disappearance of the dealer listings:

And then just as a follow up, it looks like you’ve taken the dealer listings off the site, is that a temporary thing or is that a permanent change?

Marshall Chesrown

Yes, I wondered if someone is going to say that. We have a plan – we’re getting ready to launch as we said some really, really interesting enhancements, I will be interested to get everybody’s feedback on them with regards to the website and we do see a huge opportunity to be a significant listener of vehicle both for consumers and dealers but we want to do it in a different format and I won’t get into all the details of it but I would tell you that before the quarter you will see what that plan is as it’s rolled out.

Excluding dealer listings, inventory has grown from ~125 in November of last year, to ~300 in March and now to a little over 1,000 today.

My take is that inventory procurement is the gating factor.  The company has said that themselves.  On the fourth quarter call CFO Steve Berrard had this to say:

This is really a buying product challenge. It’s not selling it. We proved we can sell it by the fact you know, when is the last time you heard a vehicle retailer have days-turns in the 20s, because the market is there to sell it.  It’s buying of it, that’s the bigger challenge for us.

A key metric to watch will be how well they continue to acquire inventory.  The ramp over the last 3 months as well as the confidence they showed by removing dealer listings are positive data points.

Acquiring inventory is all about making lots of offers and getting the owners to accept them.  To expand inventories RumbleOn needs to:

  1. ramp offers
  2. improve acceptance rate

The ramp of offers is all about using technology to streamline the process:

We already which is very early in the cycle earlier than we anticipated we already do not have data people but data is being produced by our system and the data that we have we simply have a supervised whether it is released in those vouchers if you will, those cash offers. We have gone from being able to do about 20 an hour with the new technology enhancements, a single supervisor can do about an 100 an hour

Cash offers were 3,900 in the fourth quarter.  That improved over 200% in the first quarter to 12,000.  On the last call they said they were on pace to double cash offers in the second quarter.

Acceptance rates on those offers have been trending in the right direction as well.  Acceptance rates were 12% in the fourth quarter rising to 14.9% in the fourth quarter.  Chesrown thinks they can get this as high as 20% over time.

So all good signs.  Even so I feel like obtaining the right inventory at the right price is going to remain the big challenge for the business.

Reviews

Case and point: if you look for negative reviews of the company, what you find will almost inevitably be a bike owner complaining that the offer RumbleOn made for their bike is too low.

The business is based on the premise that you are saving enough in terms of time, hassle and getting a guaranteed cash payment to make you willing to give up the $1,000 that you might get if you sold the bike yourself.  And this is an equal or better price, all with less hassle, then you’d get if you went to your local dealer to sell.

You can find reviews of RumbleOn on BBB, Facebook, GooglePlay and on the Harley Davidson forums.

Other than the complaints about the offer prices the reviews are almost all positive.  Customers get paid for their bikes on time, they receive their bikes quickly and they are consistent with what was ordered.  The app is easy to use, it’s a simple process to get an offer on your bike and likewise it is easy to purchase a bike.

Guidance for the year

The company reiterated their full year guidance.  They expect $100 million of revenue in 2018 and “in excess” of 10,000 units for the full year.

They changed the way they are getting to the $100 million from what they said on the previous call.  Management had previously guided to $100 million but on 8,100 units sold.  Their mix has changed. Rather than expecting sales would be dominated by Harley’s they now expect a better balance between Harley’s and non-Harleys.  Harley’s are higher price, lower margin units.

This is a really new business and I don’t feel like management (led by CEO Marshall Chesrown and CFO Steve Berrard) know exactly how all the levers will play out.  They’ve been surprised by the number of non-Harley’s, surprised by the number of dealers buying, and surprised by the strength and margins they are getting from the auction channel.

Nevertheless I’m pretty confident that Chesrown will navigate his way through this.  The guy has a impressive background.

Management

Chesrown started off selling cars first in San Diego and then in Colorado, where he was managing 17 dealerships by the time he was 25.  He started his own dealership chain soon after which was eventually bought out by AutoNation for $50 million.  He has been called the “best used car salesman in the country”.  There is a great biography of his early life in this article in the Inlander.

After making a fortune in the auto business Chesrown tried his hand in real estate development and lost it all in the crash of 2008.  But not to be deterred he went back to his roots and founded Vroom in 2013.

Chesrown was COO and a director of Vroom until 2016, when he left to start RumbleOn.    Though Vroom has hit on harder times this year, it was valued at over $600 million last year.

There are some similarities between the model used by Vroom and RumbleOn but there are also differences.  I get the feeling Chesrown learned there and the learnings are now being applied.  There have also been a number of executives that have left Vroom for RumbleOn.

Steven Berrard, the CFO, also has a pretty crazy history.  He was the CEO of Blockbuster in the 90s, left there to work with (his friend?) Wayne Huizenga as COO of AutoNation, and from there took over Jamba Juice and eventually became CEO.  He also led Swisher, which eventually ran into accounting problems but that was all after he left.

It’s a little nuts to me that these guys are leading an $80 million market cap company.

The management team and directors own a lot of shares.  Together its about 75% of the Class A and Class B shares.  Chesrown and Berrard own 36.5% between the two of them, and together the two own all the (1 million) Class A shares, which have 10:1 voting rights and effectively give them full control over the direction of the company.

Profitability

Buying and selling motorbikes online is new but buying and selling vehicles is not so much.  In addition to publicly traded Carvana and Vroom, there have been Beepi, Shift, Fair, Auto1, Carspring and Hellocar and a bunch of others.

These companies haven’t all been successful.  From what I can see Beepi, Carspring, and Hellocar all ran out of money.  Shift and Fair seems to be doing ok, though Shift has had some bumps in the road by the looks of it.  Auto1 is a German company that seems to be doing well.

I think the basic problem with theses businesses is what you see in Carvana’s financials.  It takes a long time to get cash flow positive.  Carvana has already been around for 5-6 years and yet when I look at the estimates it doesn’t look like they are expected to generate positive EBITDA until 2020.

So these companies need a source of funds to keep themselves going.   When those funds dry up, like they did for Beepi, the business goes away.

RumbleOn has similarities and differences here.  This is low margin and always going to be.  In the first quarter RumbleOn had gross sales profit, which is defined as the difference between the price RumbleOn bought the bike and the price they sold it at, was $1,132 per bike, or 12.3%.  Gross profit, which includes costs associated with appraisal, inspection and reconditioning, was $788 per bike, or 8.6%.

The average margin on a Harley was 7.5% while for non-Harley Davidson’s it was 13.1%.  Non-Harley’s seem to have a higher gross margin than Harleys, which has to do with their lower price point.

So it’s a low margin business and always will be. So RumbleOn needs to be tight on expenses and focused on volume.

That’s why I think the thing I like best about what I hear from Chesrown and the RumbleOn management team is their focus on getting to profitability and inventory turns.

They want to get RumbleOn to cash flow positive quickly.

Breakeven

Berrard laid out where they would be in terms of costs by the fourth quarter.  They also said the goal is to be cash flow positive by the fourth quarter.  Guidance for the year is $100 million of revenue, 10,000 bikes sold.

To get to the unit sales guidance they need to sell 4,500 bikes by the fourth quarter, up from 878 in the first quarter.  I’m assuming they hit their second quarter guidance of doubling bikes sold in the second quarter.

I took all the guidance information and made a few assumptions around consumer sales (expecting it to rise from 9% in Q1 to 25% in Q4) and their warranty financing (expecting uptake/dollar value to rise from 35% in Q1 to 53% in Q4), and I came up with a break-even model (thanks to @teamonfeugo for helping me work the kinks out of the model).

So I don’t know if this model with be accurate.  The business is new, there’s some guessing on my part and I’m just going on what we know from the calls.  But what is clear is that the growth is significant and if they can get there by Q4, then 2019 should be the year of cash generation.

It’s also worth noting that margins so far are primarily driver by the vehicle margin.  Companies like Carvana are generating about half their margin from financing and warranty sales.

Comps

RumbleOn has 12.9 million shares outstanding.  So at $6.25, which is roughly the average price I bought the stock at (I know its ran up the last couple days but I don’t want to redo all of this again), the market cap is about $80 million.

Compare that to Carvana, which has a market capitalization of over $6 billion.  Carvana is of course much bigger.  But on a per unit basis, RumbleOn looks very reasonable.

Carvana has higher gross margins per unit than RumbleOn but that is because of financing, service contracts and GAP waivers.  As sales to consumers grow RumbleOn can expand these other offerings.

On just a pure selling price minus purchase price basis, once scaled RumbleOn has pretty comparable margins to Carvana.  It also took them a lot less time to get there (Carvana vehicle unit margins were only about $600 as recently as last year).

It’s hard to look for comparisons from the other online car companies.  Vroom, Shift and Fair.com are all private and I can’t find much information on valuation or how many cars they sell.   The only somewhat interesting observation I can make is that in terms of unit inventory (this of course being cars for these three companies versus bikes for RumbleOn), they do not appear to be significantly larger.  Vroom has about 2,500 cars on their site, Fair has a little over 7,000 and Shift only has about 800.  RumbleOn was a little over 1,000 at last glance.

Multiples

Here’s a table of what RumbleOn’s market capitalization looks like at different revenue multiples and $100 million of sales.  The 3.4 multiple is based on Carvana’s forward 2018 revenue multiple.

I realize the numbers are high, but it is what it is.  I’m using the company’s guidance and Carvana’s multiple.  Consider that RumbleOn is growing faster than Carvana at this point.

What sort of multiple does RumbleOn deserve?  I’m sure you can make an argument that because the margins are low, the multiple should be low.  That’s one perspective.  But they are also growing like a weed.  And then there is Carvana.  If Carvana gets almost a 4x multiple, I don’t see why RumbleOn shouldn’t get at least something above 1, probably more.   That multiple should grow as they become more established.

I realize that the used car market is way bigger and so maybe there is a premium for that.  But used bike sales aren’t exactly small themselves, especially compared to RumbleOn’s size.   According to their S-1 there were 800,000 motorbikes sold in 2016 and 50% of those are done on a peer to peer basis.  Then there is the eventual expansion into other sports vehicles.   RumbleOn also doesn’t have the 5-10 online and gazillion bricks and mortar competitors fighting with them for share.

What to look for

First, I want to see the website inventory continue to expand.  Offers should continue to grow and acceptance will hopefully increase.  At the same time their days sales are equally important.  That number was 42 in the first quarter versus 38 in the fourth quarter.  Carvana days to sale were 70 in the first quarter, down from 93 year over year.  RumbleOn has focused on turns and needs to continue to do so.

Second, I want to see consumers comprise a greater percentage of sales, and (ideally) I want dealer sales to take place more and more through the website.  But most of all I just want to see sales grow.

Third, I don’t want to see their costs blow up.  Costs are going to increase as the business scales but they should also come down to their targets in terms of percentage of revenue.

Fourth, at some point I expect they will expand into other sport vehicles.  They’ve mentioned expansion into ATV’s, UTVs, snow machines and watercrafts as other targeted areas.

Conclusion

Online used vehicle selling is a tough space to be in.  Carvana has a great chart this year but there was a lot of skepticism (and a high short interest) when it went public.

A lot of other players have ran out of cash.  Beepi, Carspring, Hellocar and now Vroom have all struggled.

But all these guys are all selling cars.  I think RumbleOn has some advantages selling bikes.

  1. They are much easier to transport.
  2. They are a niche market compared to used car sales and thus more difficult to sell yourself via Craigslist or Kijiji.
  3. They don’t have the same level of competition online. And their traditional dealer competition is arguably less savvy than the used car dealer incumbents (remember that a lot of used car dealers take bikes on trade but don’t want to sell them, so they are actually a source of inventory to RumbleOn).

They are also offering a quick cash, no haggle, simple model for buying and selling bikes in a business that has traditionally relied on squeezing extra margin by making the process as difficult and opaque as possible.

The other advantage here is that RumbleOn is 100% online.  On the last call they talked about how they can scale without adding to headcount outside of marketing and technology.  They basically operate out of a single building.  They aren’t even touching the inventory themselves.

The other advantage RumbleOn has over most (not all) of the online car players is that they’ve involved the dealers.  Like I said earlier they are agnostic on the distribution channel.  They will sell to consumer, dealer and auction.

This allows them to ramp sales (albeit it at a lower margin) much faster than if they had to rely exclusively on consumer marketing of the app and website.

Finally, I think these guys have the right idea by focusing on inventory turns.  They don’t care who they are selling to, and they aren’t trying to squeeze every last bit of margin out of the sale.  They just want to get that inventory in and ship it out as quickly as possible.

When they get into power boats, snow machines and ATV’s I think most of these advantages are amplified.

If I’m thinking about this right, growth is gated by how quickly they can acquire inventory.  Given the rate at which cash offers and acceptance are increasing, I think that is well under control.

So it looks pretty interesting.  Nevertheless its a tough business because gross margins are guaranteed to be low. Its all about driving volume, keeping costs down and where possible upselling through warranties and financing.

So far they doing all of this quite well.

As you know I usually take a small position (usually 2% or a little higher) in a stock and then if it works I start adding as it rises.  With RumbleOn, I’m excited enough about the idea to make that higher right from the start.  I think if this works it will have some legs.  So we’ll see.