Having just returned from a six week trip to Europe and Asia, I wanted to tackle something I heard a lot about during my sojourn overseas: used-cars sales, particularly the roaring business they did at the start of the pandemic, and ironically, the plummeting stocks of online used-car platforms in recent months. In Southeast Asia, I learnt about the sudden yanking of the much awaited dual listing in Singapore and New York of Carsome Group, the region’s largest used-car online marketplace, ostensibly because of volatile market conditions and deteriorating economies in its key markets.
All car owners, even those who only ever buy new cars, have stories to tell about their experience of selling their used car. It isn’t just the hassle of trying to sell the car, but wondering if you have really got a fair price for your car. People have been buying stuff online for over 27 years. How difficult would it be to sell your own old car, or indeed buy a used vehicle, from the comfort of your living room sofa? The promise of online used-car platforms was simple: You don’t need to spend too much time googling to figure out what the car you are selling or buying is actually worth. You don’t need to haggle with fast-talking, pushy used-car salesmen who wants you to quickly make up your mind about whatever is on offer. The platform’s algorithms take care of everything. Without compromising on the price, you could still walk away knowing that you got the fairest bid possible for your car, whether you bought or sold one.
America’s used-vehicle market is huge — US$650 billion ($904.6 billion) worth were sold last year — and incredibly fragmented. Ideally, an industry like that would be ripe for disruption and one or two large players would run away with the prize, but so far the used-car sector’s switch to online sales has been disappointing. Used-car business soaks up a lot of cash and online platforms need to raise more money to acquire scale to help pave their path to profitability. While online used-car platforms are steadily growing their share of the market, they currently account for under 10% of the total used-car sales in the country. Americans may be doing a lot more things digitally than ever before, but when it comes to buying cars they still like heading to a used car lot, kicking tyres of cars they fancy and haggling with used-car salesmen over price.
At the height of the pandemic in 2020 or following the peak of meme stock mania in the US early last year, online used-car platforms that let consumers buy, sell and finance cars online were selling at stratospheric valuations. They were touted as “true disruptors” in the used-car sales space. Little wonder, then, that a spate of used-car firms with names like Vroom, Carvana and Shift Technologies rushed to list on the tech-heavy Nasdaq bourse, joining previously listed online-only used-car platforms as well as hybrid brick-and-mortar and online firms like CarGurus, Cars.com, TrueCar, and CarMax.
Carvana’s vision
Carvana isn’t just the biggest player in the used-car world. Early last year, it was being touted as the hip new icon of the booming online used-car platforms. Co-founder and CEO Ernest Garcia had the vision to build glass-tower car vending machines which made online used-car sales platforms look cool to all the millennials buying their first car.
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It was the best of times and also the worst of times for online used-car platforms. If you couldn’t go to the nearby used-car lot to haggle with a smooth-talking salesman with safe distancing and Covid lockdowns, your best bet was to try and buy a used car online. Early last year, with supply chain bottlenecks wreaking havoc across the auto industry with shortages of chips that are now key components even in low-end cars, global automakers from General Motors to Toyota Motors to Italian-American conglomerate Stellantis (which owns Fiat-Chrysler and the Peugeot Citreon’s holding firm French PSA Group) were forced to shut down production plants around the world. That helped boost demand for used cars worldwide and sales of online used-car platforms.
Yet, just as the end of the lockdowns forced pandemic-era stocks like video-conferencing site Zoom Video Communications, telemedicine firm Teladoc, digital signatures software firm DocuSign and e-commerce enabler Shopify to plunge 75% to 80% from their peak, it is similarly impacting online used-car platforms. In some ways, the trials and tribulations of online used-car platforms mirror the dramatic rise and fall of online real estate firms like Zillow Group, Redfin, OpenDoor Technologies and others whose stocks have declined sharply from their own pandemic peaks as housing sales and prices across North America surged over the past two years. I wrote about iBuying algorithms and the end of the home-flipping obsession in America in this column last November. Zillow stock is 85% from its pandemic peak, OpenDoor shares have plummeted 87%, while Redfin stock is down 92%. And those three are the leaders in what has been hottest real estate market America has seen in decades. Though rising interest rates have dampened demand for housing, across the US, demand remains strong and prices in many areas continue to inch up, albeit slowly, compared to the breakneck pace of late 2020 and much of 2021.
The comeuppance for global online used-car giants has been as brutal as online housing firm. Carvana’s shares are now down 95% from their peak just 10 months ago, while its market capitalisation has fallen to just over US$4 billion. Its initial public offering valued the company at just US$2 billion. At the peak, the giant online used-car platform was worth over US$70 billion. Shares of Shift peaked in August 2020. They are down a whopping 96% since. Shift’s market capitalisation, which was once close to US$1.3 billion, fell to just US$51 million in the aftermath of a gruesome selloff in American used-car firm stocks in mid-June. Vroom, which made its Nasdaq debut just weeks after the Covid lockdowns in 2020, has seen its stock plummet 98.5% from its peak. Vroom’s market capitalisation is now just US$175 million, a shadow of its US$11.7 billion market value last year. Ironically, the best-performing used-car marketplace CarMax is an old-fashioned used-car sales firm that also has an online side business. But even hybrid physical and online used-car business CarMax’s stock is down 42% from its peak.
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Carvana sold US$12.8 billion worth of used cars on its platform last year compared to US$5.58 billion in 2020. Jefferies & Co analyst John Colantuoni projects revenues to top US$16.1 billion this year and grow to US$18.2 billion next year. Carvana’s gross profit per unit, a key metrics in used-car industry, is likely to slip to US$3,361 this year from US$4,536 last year, the Jefferies analyst says, while its average loss on each car sold is likely to surge to US$2,976 this year from US$675 last year. Carvana has been criticised for issues like not promptly registering used cars it sells to the new owners. “Near-term macro concerns are mounting and the dynamics around rising rates, elevated used-vehicle prices and waning consumer demand drive increasingly difficult near term visibility,” notes Zachary Fadem, senior equity analyst at Wells Fargo Securities in New York who covers online used-car platforms.
Carsome disrupted
Given the macro headwinds, is it any surprise then to see Carsome, one of Malaysia’s largest unicorns, abruptly pulling its dual listing? Carsome, which consummated its A$191 million ($183 million) acquisition of Australia-listed iCar Asia earlier this year, has a regional footprint including Singapore, Thailand and Indonesia. Carsome had raised US$290 million at a valuation of US$1.7 billion in a Series E round led by the Qatar Investment Authority as well as 65 Equity Partners and Seatown Private Capital Master Fund, which are both backed by Singapore’s Temasek Holdings.
To be sure, January, the month in which Carsome did its last fundraising round, was in another era. Here is what has changed in the past six months: US Federal Reserve’s aggressive interest rates hikes have marked the end of cheap capital. The Fed is now expected to raise interest rates by 75 basis points on July 27 and another 50 basis points on Sept 21, on top of 150-basis-point hikes so far, bringing rates to nearly 3% by year-end. With the Fed unlikely to stop hiking in December, investors’ appetite for high-growth, free cash flow-negative companies like online used-car platforms has plummeted and is likely to remain low or deteriorate further.
When access to capital becomes harder, investors — whether they are venture-capital (VC) firms funding the next private round or public investors buying into IPO or pre-IPO firms — like to protect themselves by asking for substantial reduction in valuation. In recent months, down-rounds of private company offering additional shares for sale to Silicon Valley VCs at a lower price than had been sold for in the previous financing round, have been substantially lower — between 30% and 50% lower in many cases. Those down-rounds are likely to get far worse before they stabilise some point next year. If the stock of Carvana, the largest purely online used-car platform which had a market capitalisation that was 50 times bigger than the private valuation of Carsome in January, has fallen 90% over the past six months, what sort of down-round would the Malaysian firm have to settle for if it was raising cash from VCs today? Or what sort of valuation if it was seeking an IPO? 50% lower? Or closer to 90%, that would put it on a par with Carvana, Vroom, Shift and other global peers?
Buying and selling cars online and losing VCs’ money to build scale over time might be feasible in a world awash with cheap cash. But rising interest rates have changed the equation. The biggest chunk of online used-car platforms’ revenue stream is financing. As interest rates continue to rise, the loss-making platforms are likely to see losses rise. The likes of Caravan, Vroom, Shift in the US and Carsome in Southeast Asia need to rethink their business model. VCs and public-market investors will no longer fund pipedreams of online used-car firms. Used car platforms need to forget about dramatically growing market share and outpace potential competitors by burning cash as they race to displace brick-and-mortar incumbents and focus on profitability to see through the next few years of headwinds.
Carsome may have missed the opportunity to list in the foreseeable future. It’s unlikely that conditions will improve dramatically over the next few years for a loss-making platform from Southeast Asia to lure public investors in the US. It needs to downsize, conserve cash and wait for the economic cycle to eventually turn before it can raise cash again even at a dramatically lower down-round.
Assif Shameen is a technology and business writer based in North America
