Some updated thoughts on RumbleOn Inc. (RMBL)
After reading the company filings and making my first share purchases, I’ve had some time to think about the business model of RumbleOn Inc., and speak to some other investors about it. I’ve shared some of thoughts I came away with below.
I’m still excited about the opportunity long term despite the limited track record of the company and short operating history. The more I learn about the business, industry and competitors, the more I realize how important this management team will be to the success of this business.
My guess is, if things work out – and execution risk is quite high – shares will be worth multiples more than the current valuation. How much more? Nobody could possibly know at this stage. Right now, this is much more about product/market/fit than any sort of valuation, and my guess would be that the business itself may look a lot different a few years from now.
With that said, after speaking with some others investors, one in particular pointed out the following things to me, which need to be weighed heavily against any bull thesis for RMBL:
RumbleOn reports their revenue as what can be looked at as ‘gross revenue’. Meaning, bikes sold x sale price = gross revenue. This is fine, but if they (I haven’t heard it yet from management) or other investors who are long are going to call the business a ‘platform’ model in the same category as a Zillow or Expedia etc., that is a bit misleading. ‘Net’ revenue is really what matters here, especially if we are going to use an EV/Revenue valuation, which is what I’ve seen in most write ups and blog posts – including my own.
Price/sales works well for companies that are able to realize significant leverage on the gross margin line. In a true technology platform, your COGS is running the platform, which allows incremental revenue to really drive the margin forward. With RMBL, COGS is the cost of running the platform (plus the price at which the seller is willing to pay), and revenue here is the price the buyer is willing to pay. So that means if revenue doubles, we will see an almost identical increase in COGS.
There will still be opportunity for operating leverage further down the income statement, but we all have to be mindful of gross versus net revenues here, especially when using an EV/Revenue valuation method. Most companies trading on a price/sales basis have 50-80%+ gross margins. Not 13%.
My own thoughts:
From what I understand about competitors, for most bike owners, their local dealership may buy their used bike relatively quickly, but will hammer them on an offering price. Place like CycleTrader and C2B offer somewhat better pricing, but can take much longer to complete the transaction. Nobody has RMBL’s combo of speed, efficiency and/or certification. RumbleOn’s ability to ship bikes nationwide, and large inventory allows them to offer somewhat better pricing than a local dealer.
I think the reason behind the marketing success stems from RMBL identifying their core audience early, and targeting them with precision. Digital ads and event marketing have a high return when you’re focused and not just blasting ads out nationwide.
These guys have some serious traction. Can someone name another microcap that has gone from $7mm in revenues to $100mm (if they can hit it Y/E 2018) within a two year time frame? There might be one, but I’m unaware. In line with that thought, this management team is not your typical microcap management team. They are a clear cut above most, not all, CEOs, COOs, CFOs, I’ve invested with and listened to on conference calls. These guys are incredibly smart and experienced, and fanatics about their business.
The fact that these guys have mastered inventory turns like this speaks to their operating experience and expertise – if they can keep turns at this level or lower, returns on capital will be driven much higher
In a low margin business, you need high asset turnover with minimal investment in fixed assets to drive high ROIC – less capital required to finance the business – money is tied up in inventory for short periods
Not having to tie up capital in inventory or expensive warehouses, refurbishing centers and storage facilities is so crucial – a real differentiator that is overlooked in a low margin business – returns on capital won’t be depressed, and if used car prices ever take a downturn, or people stop buying, companies like Carmax, Carvana may suffer with high fixed costs and debt obligations, whereas RumbleOn may actually benefit – people tend to get rid of their ‘toys’ first during bad economic times – cash offers look very attractive as well as as trusted platform to do so
Who is coming in with $100mm and trying to compete with RumbleOn? Would take a marketing blitz, cash offers, the ability to enter and penetrate new markets, similar growth in website visitors, inventory and sales, among other things. If RMBL becomes the go-to place for selling your bike or rec. vehicle and/or shopping for a used one, it’s over. How many marketing dollars, capital raises or years that is going to take, if it even happens at all is not yet clear.
A note on SG&A: hopefully admin. costs and marketing expenses can be spread out over a larger volume of transactions. That’s my hope for the future.
I do wonder if RMBL is waiting to purchase bikes when they are available cheaply via auctions, so that they can turn inventory quickly? Maybe acquiring more inventory for their site (the number has ticked up slowly) isn’t worth it given risk, financing cost or storage costs? Maybe not enough people want to actually buy from their site for it to be worthwhile for them to acquire more inventory. Maybe this is why sales to consumers make up only 9% of revenues versus sales to dealers/auctions at 91%?
It seems like most online marketplaces are driven to increase volumes/scale to grow the brand, attract customers and take share/increase network effects. This doesn’t seem to be happening here with the listings. Management has said they don’t want to see the listings grow too fast. Why?
When I mentioned execution risk – it basically stems from figuring out the optimal level of turnover days – the sweet spot – which will then allow them to scale quickly and efficiently. I feel good about partnering with this management team on that, and assume they will figure it out. The business plan is funded in the near term – Ally Bank credit line as well as Hercules Capital loan.
If you are a partner within RumbleOn’s network – you want to form a relationship with them – they bring low cost incremental revenue to your business. Once word of this spreads, if you operate a warehouse or reconditioning center in one of their markets, you want to get involved – these relationships may be difficult to replicate
Costs almost nothing for RMBL to enter new markets, whereas competitors have to hire people, build warehouses, ramp marketing etc.
I’ve thought about competition. It’s happened in small doses where VCs like the space and attempt to get involved, but have had little success to date. Companies like Shift, Blinker, Beepi, Vroom haven’t been able to replicate this model. However too much well-funded competition could drive up marketing costs which would create some issues. With that said, you’d also have to replicate the distribution and logistics, technology, data set and dealer/partner network. Not easy things to do in a short period of time.
I’d imagine the company that achieves the best/largest/most trusted two-sided network wins out in the end. Who wants to buy from a RMBL competitor with no bikes? Who wants to sell to a competitor who can’t provide a cash offer or do it quickly/efficiently? An interesting thought here is that RMBL is setup to actually help users sell their bikes. Craigslist is free, but EBAY most likely only cares about listing fees and is not incentivized to actually sell your product.
With that said, we have to be careful when referring to RMBL as a ‘platform’, ‘broker’, or ‘intermediary business’. This is because retail sellers aren’t using the RumbleOn platform to sell to other retail buyers. They are selling to RumbleOn. Doesn’t that eliminate the two-sided network effects? In other words, why does the ability of a seller to sell his bike to RMBL (not a retail buyer) grow more valuable as the number of buyers/users of RMBL website increase? If that were the case, you’d have to assume that RMBL pays more for seller’s bikes as their network of buyers increases, which is not part of the investment thesis.
If it were up to RMBL, they would buy from consumers and sell to consumers. No dealers/auctions. Basically, selling to a dealer is the worst possible outcome. RMBL has to ‘borrow’ someone else’s customer network and give up some margin in order to sell a bike. This is because RumbleOn’s network isn’t big enough yet. This shouldn’t be confused with ‘they can’t sell all the bikes they buy’ because that isn’t the case. There has been ZERO issues with sales. It’s just that waiting to sell to a consumer ties up capital in inventory just to wait for a tick higher of gross margin. Not worth it, in my opinion. I’d rather have 5 dealer transactions at $600 gross profit within a short time frame than 1-2 consumer transactions at $1,000 gross profit within a year time frame.
The competitive advantage is not yet in place, but this is a business whose moat or can absolutely widen over time if the concept sticks. What we are seeing is the potential development of the most trusted brand, only place where people can receive no hassle cash offers, free shipping/pickup, ease of use via 100% online transactions, low cost bike sales, best inventory selection, network of other sellers (classifieds) and capital efficiency that we haven’t seen among industry incumbents.
Looking forward to following the business in the years to come.