#022 - Shift Technologies

Shift is another online used car retailer. Shift has the opportunity to grow into a larger business through performing financing in-house and continuing to expand into more cities across the country.

Shift Technologies - (NASDAQ: SFT)

Shift is another online used car retailer. Shift is much smaller than Carvana, Vroom, and CarMax. Shift has the opportunity to grow into a larger business through performing financing in-house and continuing to expand into more cities across the country, but will this be likely?

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Industry Overview

The used car retailing industry is a massive and fragmented market with numerous companies trying to win market share. There are older existing companies such as CarMax trying to capture more market share and newer companies such as Carvana, Vroom, and Shift that are trying to out perform the “legacy” competitors.

I’ve been researching this space for the past couple weeks and one of the main concerns I’ve been thinking about and reading about is that since capital is so cheap right now, it might not take much for new companies and competitors to try and compete with the companies mentioned above, drive down pricing, and take away any profits that these companies might be able to capture.

On the flip side, just because there are many companies competing in a space doesn’t mean there won’t be a handful of winners and many losers. Over the long-term, the winners will prevail while the losers die off. I’m sure 20 years ago there were many companies trying to compete with Amazon, but nowadays we only hear about Amazon. Maybe, the same can be said for the online used car industry? Competition alone shouldn’t scare you away. Competition combined with the inability to see a winner emerge should scare you away.

If you want to get a more complete picture of the used car industry, feel free to read through my shallow dives on Carvana and Vroom. These companies buy cars from wholesale auctions, from consumers, or through other sources and try to fix these cars up and sell them to consumers.

Business Overview

Shift Technologies is another online used car retailer similar to Carvana and Vroom. Shift went public via a SPAC in October and has been public since then.

Shift’s main locations are on the west coast, “we currently operate six West Coast Hubs capable of reaching over 85% of the California population and a large portion of the populations of Oregon and Washington.” Shift has also recently expanded into Seattle and some cities in Texas. The bull thesis is pretty easy to uncover. “Shift will be able to expand into more cities across the country, add on additional services (primarily financing in-house), and through a large enough scale, turn a profit.” Shift is a pretty small company based on its market cap (~$640 million) relative to the other companies I’ve covered over the past few weeks.

Shift has a similar business model to both Carvana and Vroom. Shift operates its own reconditioning centers and logistics operations (for the most part) but relies on some third parties for reconditioning and transporting vehicles when Shift’s existing facilities can’t handle the amount of cars being bought and sold by Shift. Shift relies on 3rd party finance companies for financing a vehicle purchase for its customers. Shift takes a small commission of any financing transactions and recognizes this as revenue with 100% gross profit margins. Other companies like Carvana and CarMax perform varying degrees of financing in-house. Shift’s management team has talked about potentially bringing financing in-house but recognizes that is a long ways away:

"You have to be like probably $800 million in revenue a year to kind of seriously think about any kind of captive business. Because if you assume half of the cars that you sell will be sold through captive, that gets you about $100 million a quarter in revenue to securitize in terms of captive loans. And so we are like a while away from that.”

- George Arison (Shift Founder and Co-CEO)

23rd Annual Needham Virtual Growth Conference

I don’t think Shift has many features or services that are much different than Carvana and Vroom or that competitors won’t be able to imitate. One part that Shift seems to advertise that I don’t truly understand why it’s so valuable is the ability to have an “on-demand test drive.” Why is a test drive any better than having a 7 day return policy. I think consumers like to test drive a vehicle, but why can’t Carvana and others copy this? Maybe competitors can’t offer an “on-demand test drive” but will this really be a major difference between purchasing a vehicle on Carvana’s platform or Shift’s platform? Shift offers both a 7 day return policy and an on-demand test drive, but I think the return policy is a more attractive option of the two (but the return policy isn’t unique to Shift).

I think if you’re optimistic about the online used car industry, I don’t know why you’d be more optimistic about Shift over Vroom, Carvana, or CarMax. If you don’t like the other three companies for company specific reasons, then maybe you’ll like Shift but that’s your decision.

Total Addressable Market

This section hasn’t really changed over the last couple of weeks. The used car market is a massive market with most estimates above $750bn. Assuming 40 million used cars are bought and sold every year, slap on an average selling price of ~$18,750 and we reach our estimate of a TAM of $750bn.

I don’t think I have anything to add here this week so I’ll save you some time. If you are a new subscriber, feel free to read through my shallow dive on Carvana and Vroom if you want to learn more about this industry and why the TAM is estimated to be so massive.

Competitive Advantages

I don’t really think Shift currently has any competitive advantages or at least no competitive advantages that are strong enough for me to choose this company over other online used car retailers.

  • Scale…if Shift can get there

    I think scale is a large factor in this industry. Scale allows companies to afford more inventory, more brand advertising, and more density of its supply chain (reconditioning and logistics).

    In the 10-K, Shift acknowledges the lack of scale by saying its locations only reach, “14% of the U.S. population, we have significant runway for continued expansion” but management is optimistic about expanding. I’m just not sure if Shift can successfully expand into new areas and further afford more vertical integration and the scale advantages that come with it.

    Other larger competitors will be able to leverage a brand name much cheaper and easier than Shift will be able to. Carvana is already reaching a lot of the US population and CarMax is too.

  • Brand

    I think branding will be important when buying a used car online and even in-person. You need to have a great experience in order to feel comfortable buying a used car (likely you’re second most expensive purchase).

    If you don’t feel comfortable buying a car through an online retailer or you have friends who haven’t had good experiences, that may turn you away from Shift or other online used car retailers. If Shift can develop a brand (something unlimited amounts of capital can’t take away) then maybe it can have a stronger competitive advantage but I don’t think it has a superior competitive advantage today.

    Unless you live in one of the areas that Shift has a hub, then I doubt you’ve heard of Shift if you’re a consumer. I haven’t even heard of it before doing research on some competitors in this industry. You’re much more likely to have heard of Carvana, Vroom, and CarMax simply because of scale and national branding.

Financials

Similar financial results to Carvana and Vroom. I’m somewhat disappointed with the revenue growth as other companies (mainly Carvana) has better growth, but still commendable results. Many investors still have concerns about the scalability of this business and whether or not gross margins or even net income margins will improve to support the valuation of some of these businesses.

Not surprising given Shift’s business model, but “other revenue” which is mainly “financing and vehicle protection products…and other ancillary products” which are offered through Shift but other 3rd party sources take the bulk of the costs and Shift just collects a commission.

2020

  • Ecommerce revenue = ~ $158.0 million

  • Other revenue = ~ $6.4 million

  • Wholesale revenue = ~ $31.3 million

  • Ecommerce gross profit = ~ $4.1 million

  • Other gross profit = ~ $6.4 million

  • Wholesale gross profit = ~ $1.7 million

  • Ecommerce vehicle unit sales = 9,497

  • Wholesale vehicle unit sales = 3,638

  • Ecommerce gross profit per unit = $434

  • Other gross profit per unit = $673

  • Wholesale gross profit per unit = $176

  • Ecommerce revenue growth = 16.8%

  • Other revenue growth = 102.9%

  • Wholesale revenue growth = 12.5%

  • Ecommerce gross profit margins = 2.6%

  • Wholesale gross profit margins = 5.3%

2019

  • Ecommerce revenue = ~ $135.3 million

  • Other revenue = ~ $3.1 million

  • Wholesale revenue = ~ $27.8 million

  • Ecommerce gross profit = ~ $4.0 million

  • Other gross profit = ~ $3.1 million

  • Wholesale gross profit = ~ -$8.9 million

  • Ecommerce vehicle unit sales = 8,263

  • Wholesale vehicle unit sales = 2,828

  • Ecommerce gross profit per unit = $485

  • Other gross profit per unit = $381

  • Wholesale gross profit per unit = -$1080

  • Ecommerce revenue growth = 10.1%

  • Other revenue growth = 20.4%

  • Wholesale revenue growth = 341.0%

  • Ecommerce gross profit margins = 3.0%

  • Wholesale gross profit margins = -32.1%

2018

  • Ecommerce revenue = ~ $122.9 million

  • Other revenue = ~ $2.6 million

  • Wholesale revenue = ~ $6.3 million

  • Ecommerce gross profit = ~ $2.5 million

  • Other gross profit = ~ $2.6 million

  • Wholesale gross profit = ~ $0.3 million

  • Ecommerce vehicle unit sales = 7,232

  • Wholesale vehicle unit sales = 1,248

  • Ecommerce gross profit per unit = $348

  • Other gross profit per unit = $362

  • Wholesale gross profit per unit = $35

  • Ecommerce revenue growth = 38.3%

  • Other revenue growth = 35.5%

  • Wholesale revenue growth = 68.7%

  • Ecommerce gross profit margins = 2.0%

  • Wholesale gross profit margins = 4.0%

What’s Interesting

  • Importance of in-house processes

    Not really specific to Shift, but management has harped on the fact that having the major processes of this business in-house is critical to this business. I think the comment below bodes well for Carvana and CarMax, but not necessarily for Vroom. Vroom relies more on 3rd parties and says it’s better for capital allocation and being able to run lean, but other business leaders might differ.

    “But everything else that we can bring in, we kind of aim to bring in because we do think the full stack of experience is really important. So logistics and reconditioning are very much in-house for us. I don't -- I spoke to this a little bit earlier. I don't believe that you can kind of outsource that to somebody else.”

    - George Arison

    Shift Technologies at 23rd Annual Needham Virtual Growth Conference

  • Helping independent dealerships?

    There was an interesting piece about working with local dealerships to help these businesses sell cars quicker by having more eyeballs looking at them.

    "And so I think that's the really unique opportunity is, "Hey, can 10%, 20%, 30% of your sales over the next 5 years be not cars that you directly own, but cars that are owned by dealers, that will be reconditioned by dealers, that are sold by dealers and that then were listed by you and sold through your experience?" So the same -- if you look at Amazon's growth, vast majority of the growth on the retail business has come actually from third-party items that Amazon still controls the shipping experience and the purchase for, but it doesn't actually own."

    I think this is an interesting observation and opportunity for companies in this space. While I don’t think this is like a main thesis point for most investors, I do think this could be interesting upside for many of these companies. Most companies are already working with 3rd parties to help them sell cars.

Future Questions

  • Competition?

    I’m not sure how Shift can differentiate itself in a way that will make it a superior option over Carvana or CarMax. Shift is a much smaller company than Carvana, Vroom, and CarMax. I think this industry relies on scale in order to get better inventory, better national branding, and vertical integration in order to have a successful business in order to make a profit. I’m not sure how Shift will be able to get there considering Carvana is growing extremely fast and is already rolled out to a majority of the population.

    Shift doesn’t have many different offerings that Carvana and others can’t just copy.

Conclusion

I’m not very optimistic or bullish about Shift after researching other companies like Carvana and CarMax. I think some investors might see a better return with Shift just given the smaller size. I’d rather invest in a fat pitch and Shift just isn’t a fat pitch (or even close to being a strike for me). Shift is under a billion dollar market cap which means it’s likely much easier for Shift to 10x than it might be for Carvana to 10x, but it also might be more likely for Shift to fail than it will be for Carvana or CarMax.

If you have a different perspective I’d love to hear it, either comment below or DM me on Twitter @ StratusYoung.


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