ACV Auctions (NASDAQ:ACVA) Beats Q1 Sales Targets But Quarterly Guidance Underwhelms

Full Report / May 08, 2024

Online used car auction platform ACV Auctions (NASDAQ:ACVA) beat analysts' expectations in Q1 CY2024, with revenue up 21.8% year on year to $145.7 million. On the other hand, next quarter's revenue guidance of $156 million was less impressive, coming in 1.2% below analysts' estimates. It made a GAAP loss of $0.13 per share, down from its loss of $0.11 per share in the same quarter last year.

ACV Auctions (ACVA) Q1 CY2024 Highlights:

  • Revenue: $145.7 million vs analyst estimates of $144 million (1.2% beat)
  • EPS: -$0.13 vs analyst expectations of -$0.09 (44% miss)
  • Revenue Guidance for Q2 CY2024 is $156 million at the midpoint, below analyst estimates of $157.9 million
  • The company reconfirmed its revenue guidance for the full year of $617.5 million at the midpoint
  • Gross Margin (GAAP): 26.8%, up from 20.3% in the same quarter last year
  • Free Cash Flow of $34.39 million is up from -$33.83 million in the previous quarter
  • Marketplace Units: 174,631, up 23,068 year on year
  • Market Capitalization: $2.93 billion

Founded in 2014, ACV Auctions (NASDAQ:ACVA) is an online auction marketplace for car dealers and wholesalers to buy and sell used cars.

The company's mission is to provide an efficient platform for buying and selling used cars in virtual auction settings. By digitizing the process, ACV Auctions reduces the time and costs associated with attending physical auctions and broadens the pool of buyers and sellers. Additionally, the company provides a range of services that includes vehicle inspections, financing, and transportation to make the platform a one-stop shop.

The customers of ACV Auctions are car dealers and wholesalers who are looking for a reliable and convenient way to buy and sell used cars. The platform is especially popular among smaller dealerships that don’t have the resources to attend physical auctions. ACV Auctions generates revenue by charging a fee for each transaction on its platform.

For example, a car dealer in Texas wants to purchase ten used cars from a Florida seller. Without a digital marketplace, that Texas dealer may not have found the Florida cars. Even if those cars were discovered, the dealer likely would have had to travel to Florida to attend a physical auction. With ACV Auctions, the dealer can participate in the auction virtually and bid real-time. After purchasing, the dealer can arrange transportation of the cars on the platform.

Online Marketplace

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission-paying sellers, generating flywheel scale effects that feed back into further customer acquisition.

Competitors offering marketplaces for used car sales include Carvana, (NYSE:CVNA), KAR Auction Services (NYSE:KAR), and private company Manheim.

Sales Growth

ACV Auctions's revenue growth over the last three years has been very strong, averaging 33.2% annually. This quarter, ACV Auctions beat analysts' estimates and reported decent 21.8% year-on-year revenue growth.

ACV Auctions Total Revenue

Guidance for the next quarter indicates ACV Auctions is expecting revenue to grow 25.6% year on year to $156 million, improving from the 7.9% year-on-year increase it recorded in the comparable quarter last year. Ahead of the earnings results, analysts were projecting sales to grow 28.5% over the next 12 months.

Usage Growth

As an online marketplace, ACV Auctions generates revenue growth by increasing both the number of units on its platform and the average order size in dollars.

Over the last two years, ACV Auctions's units sold, a key performance metric for the company, grew 4.5% annually to 174,631. This growth lags behind the hottest consumer internet apps.

ACV Auctions Marketplace Units

In Q1, ACV Auctions added 23,068 units sold, translating into 15.2% year-on-year growth.

Revenue Per Unit

Average revenue per unit (ARPU) is a critical metric to track for consumer internet businesses like ACV Auctions because it measures how much the company earns in transaction fees from each unit. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and ACV Auctions's take rate, or "cut", on each order.

ACV Auctions ARPU

ACV Auctions's ARPU growth has been strong over the last two years, averaging 9.3%. The company's ability to increase prices while growing its units sold demonstrates its platform's value, as its units continue to spend more each year. This quarter, ARPU grew 5.7% year on year to $834.27 per unit.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor.

ACV Auctions's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 26.8% this quarter, up 6.6 percentage points year on year.

For online marketplaces like ACV Auctions, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, ACV Auctions had $0.27 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

ACV Auctions Gross Margin (GAAP)

ACV Auctions's gross margins have been trending up over the last 12 months, averaging 21.8%. This is a welcome development, as ACV Auctions's margins are below the industry average, and rising margins could suggest improved demand and pricing power.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like ACV Auctions grow from a combination of product virality, paid advertisement, and incentives.

ACV Auctions is extremely efficient at acquiring new users, spending only 20% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that it has a highly differentiated product offering and customer acquisition advantages from scale, giving ACV Auctions the freedom to invest its resources into new growth initiatives while maintaining optionality.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

This quarter, ACV Auctions's EBITDA came in at $4.27 million, resulting in a 2.9% margin. The company's performance has been rather mediocre for a consumer internet business over the last four quarters, with average EBITDA margins of negative 1.6%.

ACV Auctions Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. ACV Auctions's free cash flow came in at $34.39 million in Q1, down 9% year on year.

ACV Auctions Free Cash Flow

ACV Auctions has burned through $49.44 million of cash over the last 12 months, resulting in an uninspiring negative 9.7% free cash flow margin. This low FCF margin stems from ACV Auctions's capital-intensive business model and desire to stay competitive.

Key Takeaways from ACV Auctions's Q1 Results

It was great to see ACV Auctions increase its number of units this quarter, helping it beat analysts' revenue expectations. We were also glad its full-year revenue guidance came in higher than Wall Street's estimates, though the company expects next quarter to be slightly softer. Turning to the bad news, its EPS fell significantly short of projections. Overall, this was a mediocre quarter for ACV Auctions. The stock is flat after reporting and currently trades at $17.32 per share.

Is Now The Time?

When considering an investment in ACV Auctions, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although ACV Auctions isn't a bad business, it probably wouldn't be one of our picks. Although its revenue growth has been impressive over the last three years and its growth over the next 12 months is expected to be higher, its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses. And while its user acquisition efficiency is best in class, the downside is its units sold have declined.

There's no doubt that the market is optimistic about ACV Auctions's growth prospects, as its price/gross profit ratio based on the next 12 months of 19.9x would suggest. We can find things to like about ACV Auctions and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder whether there might be better opportunities elsewhere.

Wall Street analysts covering the company had a one-year price target of $21.50 per share right before these results (compared to the current share price of $17.32).

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