RumbleOn Inc. (RMBL) – a potential fat pitch
Ticker: NASDAQ: RMBL
Share price: $6.14
Market Cap: $74mm
Shares Outstanding: 12.1mm
Net Debt: $3mm
Total Enterprise Value $77mm
TTM EPS: -$1.17
LQA Revenue: $55.2mm
LQA EV/Revenue: 1.4x
I came across RumbleOn.com (RumbleOn Inc.) after reading the following piece on Seeking Alpha (https://seekingalpha.com/article/4197618-rumbleon-internet-disrupter-20-billion-industry?v=1534184753&comments=show) and was immediately intrigued. RumbleOn is an $80mm EV business that operates as an online marketplace for buyers and sellers of used motorcycles – and soon to be boats and RVs. The company IPO’d in the fall of 2017, and despite considerable progress as a business (and a subsequent capital raise), shares remain near the IPO price today, with the market not yet appreciating the uniqueness of the business model or the untapped growth potential that RumbleOn is facing. I think we are looking at a potential fat pitch.
RumbleOn is aiming to disrupt the market for buying and selling used motorcycles (and eventually other recreational vehicles) as well as the way buyers and sellers interact. The company provides an online platform that serves as a one-stop shop for everything surrounding the purchase and sale of used bikes, including communication tools and consumer financing. After surveying the current landscape, RMBL appears to be the first to take on such an endeavor, and has experienced massive growth in motorcycle sales, customer count and unique website visits since their launch.
Given the size of the company, as well as the unprofitability, illiquidity, and short operating history, the company trades at a discount to what can be considered its closest peers in the auto industry (Karmax, Carvana, Cars.com), despite boasting better growth and margin prospects, and an asset light business model that will provide RMBL with significant operating leverage at scale. The company was founded by an all-star cast of serial entrepreneurs who own the majority of shares, and in the past had significant roles in building businesses such as AutoNation, Vroom, Blockbuster and Auto America (more on that below). This group can operate RumbleOn with unmatched market knowledge and understanding of consumer behavior in the vehicle market, and appear very much incentivized to grow shareholder value. If RMBL can come close to meeting their FY 2018 revenue and transaction guidance, the company will be trading at a valuation of around 0.6x sales.
Description of the Opportunity
RumbleOn Inc. represents an opportunity to invest in a high growth platform business aiming to disrupt a $20B industry by changing how consumers and dealers buy, sell and finance pre-owned motorcycles, RVs and other recreational vehicles.
RMBL fits many of the investment criteria I search for when looking at new additions to the portfolio, including a huge customer value proposition, high insider ownership (in this case founder/owner/operator), a decent balance sheet, a path to high free cash flow yield, operating leverage, network effects, and a huge growth runway. The company checks all of these boxes, in addition to two of my favorite, which are small size (EV of under $100mm) and underfollowed (213 SA followers, 3 analysts, no sell side research). In addition, there was a recent equity raise, some cash burn taking place, and the RMBL is currently unprofitable.
The company has a short operating history, having commenced operations in 2017, and within that time frame has been busy on the sales and marketing front, putting emphasis on increasing revenues and growing their transaction unit volume by making large growth investments across the country and online. RMBL has spent marketing dollars on biker events, sponsorships, and social media ads. These investments have led to 499,000 unique web visitors per month, and a Facebook following of over 100,000.
RumbleOn is focused on capturing a share of the 800,000 used vehicle market in the US, and increasing their lead as the only national online platform for buying and selling used motorcycles. In addition to significant growth in unique website visitors, appraisal inquiries and dealer interest, revenues have grown from $7mm in 2017 to potentially management’s guidance of $100mm (not a typo) for FY 2018.
*Q2 2018 revenues came in at $13.8mm, with Q3 guidance at $25mm and Q4 at $50mm.
RMBL is currently being valued at less than 1.0x management’s guidance for revenues, which doesn’t factor in any potential high margin income from their classified ads business, other vehicle sales, financing arm and future online auction platform. I see the opportunity for a 100% return within 12-18 months, in addition to ‘compounder’ potential if management executes and the business starts to reach scale, which could be as low as taking a 2-3% share (on their way to 5%) of the 800,000/year used motorcycle sales market (24,000 motorcycles * $9,000 ASP = $216mm in revenues).
For $80mm, a buyer of the entire business is getting a first of its kind unique platform with 500k monthly visitors, one of the most experienced management teams in this space with a history of creating shareholder value, path to high free cash flow yield with significant operating leverage, a disruptive business model, and potential for expansion into adjacent services with a huge runway for future growth.
The company is currently GAAP unprofitable, and there is some cash burn, but I see potential for 50% – 100% upside within 12-18 months with low probability of permanent capital loss given ample liquidity and bargain basement share price.
Why does the opportunity exist?
It’s always important to address why the discount is available. It appears that the market is adopting a ‘show me’ attitude toward RMBL, which is understandable given the lack of track record and guidance for aggressive growth. In addition, the company is small, illiquid, underfollowed, currently unprofitable, with potential dilution risk and expenses trending upward (sounds great, right?). As with many microcaps, you’ve got a small company with limited float (12.5mm shares outstanding, >50% insider owned), which makes it nearly impossible for large funds to hold, and unprofitable for sell side firms to cover. The company has 213 Seeking Alpha followers and is covered by 3 analysts (according to Rumbleon.com).
With that said, if management continues to execute and the company continues on its current growth trajectory, the market will be forced to pay attention.
As stated above, RumbleOn Inc. offers a platform facilitating the ability of consumers and dealers to buy, sell, trade and finance pre-owned vehicles in one online location. The company has stated that their goal is to transform the way pre-owned vehicles are bought and sold by providing users with the most efficient, timely and transparent experience. This can be compared to other online (and sometimes physical) marketplaces for things like cars such as CarMax, Carvana, Cars.com and (to a lesser extent) Copart, as well as platform businesses linking buyers and sellers such as Zillow and Expedia. Some of what the company does includes providing a proprietary pricing engine, appraisal tools, vehicle valuations, inventory management, sales management, CRM and prospecting.
This is how the platform works: RumbleOn’s platform allows customers to enter their vehicle VIN on RMBL’s website, answer some personal info and then receive a guaranteed three day cash offer within minutes. If accepted, sellers receive the cash within minutes, with cash offers part of the enticing business strategy to lure customers to the site and get them looking around.
RumbleOn then sells the vehicle to one of a consumer, dealer or authorized auction house. Inventory turns are nothing short of outstanding, with RMBL moving cars at an average of 28 days outstanding, less than half of CarMax and one-third the rate of Carvana (originally sourced from SA article https://seekingalpha.com/article/4197618-rumbleon-internet-disrupter-20-billion-industry?v=1534184753&comments=show, although information is in the annual report and shareholder letters). I doubt these levels are sustainable, but for the time being vehicles have been flying off the shelves.
RumbleOn offers a large inventory of vehicles as well as third party financing, and combines the online buying and selling experience in a way that no other competitor has offered or can match. The disruption part mentioned above can be found in the asset light nature of the business model which manifests itself though the company’s strategic regional partner relationships consisting of dealers and auction houses, which provide the inspection, reconditioning and distribution services that RumbleOn has outsourced. This is what happens when a smart, experienced management team smells an opportunity to do things differently and more efficient.
Because the heavy lifting is outsourced and sales are exclusively online, RMBL employees touch no inventory, and there is minimal capex required, allowing them to keep operating costs much lower than a Carvana or CarMax who need to build out expensive dealer lots and warehouses in order to receive more cars and attract customers.
Revenue is earned from fees and transaction income (the partner network earns revenue from fees associated with their services), with 91% of sales taking place to dealers, and 9% to consumers through 2017.
RMBL has stated they wish to move the sales mix from the current levels to 50% dealers and 50% consumers, given that 40% of consumers finance their purchases. This could eventually provide meaningful additional high margin income down the road.
Moving forward, as the business grows and the customer count increases, RMBL will be able to use customer data to optimize purchasing, customer interaction, and drive further growth opportunities especially among returning customers.
RMBL provides four key metrics on which they will focus moving forward and as measures of their success.
Drive unit volumes
Increase margin per car
I try to address each of these KPIs throughout the writeup.
As mentioned above, RumbleOn is aiming to transform the way pre-owned vehicles are bought and sold by targeting the large number of private consumer transactions driven by sites such as Craigslist or local classified ads. The company offers a 100% online marketplace, transparent sales process, certified and reconditioned vehicles (no scams) and financing, all which equates to a customer experience unmatched elsewhere.
The company’s partner strategy (outsourcing logistics) will enable them to eliminate the number of warehouse locations, reconditioning centers, and logistics facilities they would otherwise need to operate. Regional partners have the ability to showcase RumbleOn’s inventory and are granted access to preferred pricing should they wish to purchase a vehicle. There is a deep value proposition for both customers and partners in this model, with limited competition and extreme network effects whereby a great customer experience leads to more transactions which leads to more listings which leads to cost savings for both customers and RumbleOn which leads to additional customers etc.
RMBL will continue to make investments in vehicles acquired, marketing efforts, partner deals, and improving their technology in the hopes of driving unit volumes, reducing days to sale and optimizing their pricing for customers.
Operating results have been solid since 2017. RumbleOn has gone from a standing start to generating $14mm in revenues for Q2 2018 (guiding for $25mm in Q3), grown web traffic from 0 to 499,000 average unique visitors per month, garnered a Facebook following of over 100,000, and achieved gross margins of 10% (something that took Carvana six years to do). To further paint the picture of growth, RMBL recorded 678 vehicles sold for the year ended 2017, with average monthly website users at 97,877 and average gross margin per vehicle of $750. Through Q2 2018, RMBL sold 2,013 vehicles with an average gross profit per vehicle of $798.
The growth in transactions, customer traffic and unique website visitors is no fluke. The company has absolutely blitzed the marketing scene, spending nearly 50% of revenues on sales and marketing efforts in 2017, but looking to reduce that number significantly by Y/E 2018 to under 10% which I view as a bit ambitious. SG&A should continue to trend down as more transactions are completed, but the marketing side of the equation may remain high for the next few quarters. The company has taken advantage of social media marketing, event driven marketing, and tried to increase the awareness of their unique cash offer policy. The demand for cash offers has skyrocketed since Q4 2017, as this element of the business seems to be loved by customers.
Moving forward, management has guided for revenue in excess of $100mm for 2018, with unit sales in the range of 11,500 to 13,000, and an ASP of $7,000 – $9,000 with a gross margin range of 14-16%.
Even the low end of that guidance would put revenues at $80.5mm for 2018, still valuing the business at less than 1.0x sales. The concept still needs to be proven out with continued execution over the next few quarters, but going from a few hundred vehicle sales to over 10,000 in less than 12 months is quite impressive.
Company Background and Capital Structure
The background section of the company’s 10K is interesting to read, and describes how management founded the company through the purchase of software and the recognition of the need for a complete solution for acquiring and distributing used motorcycles and other vehicles across the US. I’ll summarize below.
The company was originally incorporated as Smart Server Inc. in 2016, before being acquired by Berrard Holdings, a limited partnership run by Steven Berrard (current CFO). Marshall Chesrown then acquired a block of stock and was brought on board to run things as CEO. There was a subsequent private placement and common stock offering, prior to which the company changed their name to RumbleOn Inc.
In 2017, months before the IPO, the company acquired NextGen Dealer Solutions, a vehicle appraisal, inventory management and customer relationship system in order to drive their online marketplace. This software is key to their operations. The software has been built and improved over time to now provide reliable pricing info, the ability to read almost any VIN, and allows RMBL to provide their instant cash offers.
The company has 1mm Class A shares outstanding, and 12.1mm Class B shares. There is $5.5mm in cash on the balance sheet, with the company burning in the neighborhood of $1.5-$3.5mm cash per quarter. The debt picture described below consists of $4.9mm in long term commitments and $3.6mm of which is short term.
RMBL also has a $25mm line of credit with Ally Bank at with interest charged at 7.2%, as well as a $15mm loan agreement with Hercules Capital, $5mm of which was funded at closing, charging 10.75% interest, with the Hercules loan making up the majority of the company’s long-term debt.
State of the Industry
As it stands right now, there is quite an efficient marketplace for buying and selling used cars with both parties (buyers and sellers) being able to achieve transparency, pricing, and liquidity. And yet, many online transactions can be time consuming, painful and involve shady characters. That’s in a developed ecosystem. Imagine trying to sell your motorcycle in an underdeveloped secondary market with no data, pricing info or transparency. It can obviously be done, but not without stress, time commitment and inefficiency. This is exactly what RumbleOn hopes to change.
There are of course localized and regional platforms such as Craigslist and classified ads through which one can buy/sell a motorcycle or recreational vehicle, but they don’t have the national scope that RMBL has, lack transparency and ease of use, and can sometimes force buyers and seller to interact inconveniently. There is also the risk of scams, frauds or receiving faulty equipment. In addition to the core platform, RumbleOn is also seeking to eventually build out their own classifieds business, adding increased value to their platform.
For the used/auction/damaged car market, companies like Karmax, Carvana, Cars.com, Copart and KAR all exist to provide a liquid marketplace between buyers and sellers, and all trade at materially higher valuations, some with much higher capital requirements (RMBL holds no inventory, operates online) and lower growth/margin profiles.
Here’s where RMBL thinks they can reach at scale with gross margins coming in significantly higher than peers:
RumbleOn has their work cut out for them, and I’d like to see them nail down the core part of their business – which is the motorcycle marketplace – before expanding into adjacent vehicles or services. With that said, their user and revenue growth profiles potential network effects, and first-mover advantage, not to mention their outstanding management team give me a ton of confidence that they will be able to build out their business in an way that creates plenty of shareholder value.
The company’s founders and management team are the reason why I’m most excited about an investment in RumbleOn. The inception of the business stemmed from management’s recognition of the need for the exact solutions that RumbleOn provides – a marketplace for used vehicles other than cars – based on their extensive experience in the auto sector with companies like AutoNation, Auto America and Vroom.
The company was founded by and is led by CEO Marshall Chesrown, formely of Vroom, Auto America and AutoNation, and CFO Steven Berrard, formerly or AutoNation, Blockbuster, and Wayne Huizenga Holdings.
Investors familiar with AutoNation recognize the value created for shareholders over time, employing a similar business model and strategy. You couldn’t ask for better leaders at the helm with more experience, or a better history of value creation. In addition, insiders own over 50% of shares, aligning them with shareholders and incentivizing good decision making and hopefully the avoidance of further dilution.
Their accomplishments speak for themselves, and are listed below from the company’s 10K:
Marshall Chesrown has served as our Chief Executive Officer and Chairman since October 24, 2016. Mr. Chesrown has over 35 years of leadership experience in the automotive retail sector. From December 2014 to September 2016, Mr. Chesrown served as Chief Operating Officer and as a director of Vroom.com, an online direct car retailer (“Vroom”). Mr. Chesrown served as Chief Operating Officer of AutoAmerica, an automotive retail company, from May 2013 to November 2014. Previously, Mr. Chesrown served as the President of Chesrown Automotive Group from January 1985 to May 2013, which was acquired by AutoNation, Inc., a leading automotive retail company, in 1997. Mr. Chesrown served as Senior Vice President of Retail Operations for AutoNation from 1997 to 1999. From 1999 to 2013, Mr. Chesrown served as the Chairman and Chief Executive Officer of Blackrock Development, a real estate development company widely known for development of the nationally recognized Golf Club at Black Rock. Mr. Chesrown filed for personal bankruptcy in May 2013, which petition was discharged in January 2017.
Steven R. Berrard has served as our Chief Financial Officer since January 9, 2017 and served as Interim Chief Financial Officer from July 13, 2016 through January 9, 2017 and as Chief Executive Officer from July 13, 2016 through October 24, 2016. Mr. Berrard served as Secretary from July 13, 2016 through June 30, 2017 and has served on our Board since July 13, 2016. Mr. Berrard served as a director of Walter Investment Management Corp. (“Walter Investment”) from 2010 until May 2017. Mr. Berrard served on the Board of Directors of Swisher Hygiene Inc., a publicly traded industry leader in hygiene solutions and products, from 2004 until May 2014. Mr. Berrard is the Managing Partner of New River Capital Partners, a private equity fund he co-founded in 1997. Mr. Berrard was the co-founder and Co-Chief Executive Officer of AutoNation from 1996 to 1999. Prior to joining AutoNation, Mr. Berrard served as President and Chief Executive Officer of the Blockbuster Entertainment Group, at the time the world’s largest video store operator. Mr. Berrard served as President of Huizenga Holdings, Inc., a real estate management and development company, and served in various positions with subsidiaries of Huizenga Holdings, Inc. from 1981 to 1987. Mr. Berrard was employed by Coopers & Lybrand (now PricewaterhouseCoopers LLP (“PwC”)) from 1976 to 1981. Mr. Berrard currently serves on the Board of Directors of Pivotal Fitness, Inc., a chain of fitness centers operating in a number of markets in the United States. He has previously served on the Boards of Directors of Jamba, Inc., (2005 – 2009), Viacom, Inc., (1987 – 1996), Birmingham Steel (1999 – 2002), HealthSouth (2004 – 2006), and Boca Resorts, Inc. (1996 – 2004). Mr. Berrard earned his B.S. in Accounting from Florida Atlantic University.
As I continue with due diligence, I will update the post digging into their value creation and capital allocation backgrounds more in depth.
Given the short operating history of the business as well as the many moving parts, valuing the business at this stage is a very difficult exercise.
While RMBL is still growing aggressively and unprofitable, companies with high customer value propositions, significant network effects, disruption potential and underappreciated growth don’t trade at revenue multiples of less than 1.0x.
I don’t yet have a clear picture of how growth rates for revenues and margins will play out, especially as the company spends for growth through the next 12-24 months, but I can use a conservative revenue multiple and management’s guidance as a starting point.
If RMBL is able to hit $85mm in revenues (versus guided $150mm for FY 2018), at a 1.5x multiple we have an EV of $127mm. Assuming no increase in share count for 2018 and no major balance sheet changes that gets us to a share price of around $10-11. Examining peer valuations such as CarMax, a lower growth, lower margin, capital intensive business, reveals it trades at 1.5x revenues, while Cars.com trades at 4.0x revenues and CarGurus.com current valuation is 12.1x revenues
Although the company’s estimates of growth are somewhat aggressive, and they will have to continue to execute, I see some asymmetry in the opportunity here, with shares trading at bargain basement levels. I believe upside here is very high with the chance of permanent capital loss minimal. While this may be a bumpy ride, and further dilution is possible, the company’s liquidity position, management team and operating leverage give me confidence that there is a better than not chance that investors will end up with significant value here.
Worst case scenario – share count doubles, revenue growth slows, margins never materialize, take on additional debt ($25mm credit facility untapped), shares trade at 0.5x projected run rate revenue – bargain basement versus other platform businesses with slower growth and more capital intensive – not much downside to shares at that valuation
5x 2018 FY revenues of $100mm – $150mm EV minus $9mm debt plus $5.5mm cash / 12.5mm shares = $11.70/share (share count at 16mm, stock still reaches $9.10 or 50% upside). This doesn’t factor in any additional growth or expansion
There will be another capital raise given the amount of cash burn and the fact that management is heavily beefing up growth investments in order to gain share and be the first to disrupt the marketplace
Short operating history
RMBL IPO’d in 2017, and appear to be the first true platform for motorcycle buyers and sellers – we have limited data as well as a short operating history for the business
Management has mentioned starting a classifieds business, expanding into additional vehicle types (RVs, boats, rec vehicles) and building out a finance arm. They have to get the motorcycle business right first and any focus on adjacent opportunities might distract from the cash burning, unprofitable core business
Can’t continue to grow unit volumes
If RMBL isn’t continuously buying vehicles to sell, investors may get spooked. I don’t believe there is a great gauge for this number (they list it on their site, but it may not be accurate given inventory could come in and leave in the same day – sales go up but inventory doesn’t move) so it’s tough to quantify, but declines in volumes will be important to watch out for
Overall, I’m pretty excited about the prospects for this business, especially with the current management team at the helm, and will be more than happy to sit back and be patient as the business executes over the next few years.
I’m digging in more, getting management on the phone, and will post any relevant news.