Cazoo Q2 Earnings: U.K.'s Carvana Carves Out A Path To Profitability (NYSE:CZOO) – Seeking Alpha

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Cazoo Group (NYSE:CZOO) reported yet another quarter of sizzling topline growth. But as investors have wanted absolutely nothing to do with the stock this past year, Cazoo has had little choice but to embrace a new journey, one that is focused on seeing its UK retail operations get as close to breakeven as quickly as possible.
There’s no question that with the $400 million of cash on its balance sheet, on the back of convertible raise has succeeded in buying Cazoo time.
This founder-led business now believes that its efforts to improve profitability will materially reduce its need for external funding.
Cazoo’s revenue growth rates
Cazoo reaffirms its guidance of 110% to 125% y/y revenue growth for 2022. Clearly, with the stake of things in the UK and Europe, at this stage, it feels both unrealistic and imprudent to even consider anything but the lowest end of its revenue growth range.
This implies that Cazoo would still reach £1.4 billion ($1.7 billion) in revenues in 2022. Also, keep in mind that with its market cap in dollars and with the dollar soaring so significantly against the pound, this causes yet another headwind for investors. That’s not where either the bull or bear case lies, but it is still something to ponder.
Cazoo is an online car retailer, focused on car buying and selling in the UK and Europe. Essentially, it’s Europe’s version of Carvana (CVNA).
Indeed, as you can see above, both stocks have largely followed the same trajectory in the past year.
And there are good reasons for Cazoo’s decline. To highlight some of the headwinds this is what Cazoo’s founder Alex Chesterman, that holds approximately 23% of the company, said on its Q2 earnings call,
Whilst our growth remains strong, we are not immune to the rapidly shifting external factors in the global economy, which includes deterioration in consumer confidence, volatility in the spot market and the possibility of a recession in the coming months.
These are just some of the concerns facing Cazoo’s consumers, not to mention a cost of living crisis and inflation.
As one would expect from these sorts of revenue at any cost business models, with its obsession with reaching scale, the business is hemorrhaging losses.
To illustrate, back in Q2 2021, for every £1 of revenues, the business incurred £0.44 in losses before tax and interest. While this time around, in Q2 2022, for every £1 of revenue the business incurred £0.62 in losses.
This is a business that despite its rhetoric of focusing on profitability appears to be moving in the opposite direction with losses rapidly increasing and showing no clear signs of clean breakeven any time soon.
For its part, Cazoo points investors towards its UK Retail Gross Profit per Unit (”GPU”), which was £124 in Q1 and increased to £309 in Q2, clearly a significant improvement in operations.
Furthermore, one could make the case that UK Retail GPU also improved compared to where the company was back in Q4 2022, at £233.
Consequently, one could contend that in its mature UK market, Cazoo is showing that it can be operated with a line towards profitability. And given that the stock is down so significantly, investors are now attempting to bottom fish.
In the current market that values certain profitability today rather than robust growth with profitability in the future, it becomes a challenging task to even attempt to value this sort of company.
I don’t believe that investors in 2022 are putting too much consideration into p/sales ratios. Case in point, consider Carvana’s p/sales trajectory over the past year.
The multiple that investors have been willing to pay has fully contracted. On the other hand, keep in mind that Carvana has seen its business model slow down significantly faster than Cazoo.
For its part, most analysts expect that Carvana will be growing in 2022 at approximately 25% CAGR, which is significantly less than the 110% that Cazoo is still guiding for.
Yet both businesses are priced very similarly, at less than 0.5x this year’s sales.
Cazoo sought to reassure investors that it’s now seriously determined to improve its profitability profile. That it’s still very much focused on reaching scale, but that it’s tempering its ambition with slightly more focus on its bottom line.
Also, Cazoo states that its business will not need material extra funding.
Finally, with the stock down so significantly, the outcome now has become quite binomial. Hence, I believe that the stock today offers a positive risk-reward. I rate this stock a buy.
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