Yesterday, I bought shares of Autoweb (Nasdaq: Auto) for roughly $7.05 per share
(I have to say that what’s in this email represents my opinion only and it’s purely for your information. Also, always seek advice from registered investment advisors before investing and read this important disclaimer.)
Here are some facts about the company
- Autoweb (Nasdaq: Auto) (formerly known as Autobytel ABTL) essentially sell leads to car dealers and performs advertising.
- It’s the largest lead provider because of quality. Their leads provide a return of roughly 17% as opposed to the acceptable business rate which is roughly 6-8%.
- Founded by a car dealer in 1995.
- It’s the only provider that works on a Pay-Per-Lead. The competition works on a subscription model or pay-per-click advertising.
- Trend: $9B market in 2016, 19B in 2020 as dealers going largely digital ads
- They cover 3700 retail dealers, 25000 dealer wholesale and 31 manufacturers on the program today (except Tesla)
- Auto web’s cost to dealer represents about half of all dealer’s' normal marketing expense
- It’s a small capitalization business (expects fluctuation for no evident reasons)
- They roughly get $20 per lead. They made $150M last year.
- You may have a look to this presentation to get more details.
The last quarter was terrible. The stock plunged by more than 40% because the US car sales trend was expected to be flattish-negative for the next months. Besides, they had a web quality score issue (this is still vague, intentionally) which is more problematic to my humble opinion. This issue increased their advertising cost not making the lead business profitable as before as well as not returning not as good lead as they used to do to the dealers (for which their customers complained quite a bit).
I don’t think the flattish car sales will impact short-term significantly Autoweb. Like they said during the last earnings call, the dealers tend to increase their marketing expenses to push what they have on-hand when the sales stagnate. Long terms, it is a different issue. I will definitely keep an eye on it as this could impact Autoweb’s growth.
As for the vague quality score issue, it is definitely a significant issue short terms but I think that they will figure out it on the long run. Sure, it’s probably a black box but they have the expertise, resources and contact to improve it down the road.
As for the balance sheet, they had roughly $40M in cash, $35M in receivable for only $46M in liability which sounds like a pretty good balance sheet.
Finally, this business generates very good free cash flow (it’s the money that goes straight to the bank account to make it simple), $20M over the last 12 months. At a price of $6.7 per share, a share buyer pays only 4.5 times this free cash flow which is to my a pretty good bargain.
Just a reminder that this is a small capitalization company. So, expect some significant price fluctuations without any particular good reasons. The flip side is that these unexplainable fluctuations create an opportunity for investors to reap a good company at a good price.