Why Cazoo has suffered from a plummeting share price

Online used car retailer Cazoo is suffering one of the worst post-pandemic hangovers of all the automotive tech stocks after its share place plummeted 85% since listing in August last year. The company is not alone in falling out of favour among those that listed in the controversial SPAC method in a superheated 2021, but unlike other badly hit automotive stocks such as Nikola, Rivian and Lucid, Cazoo does actually generate decent revenue, if not profits yet. By the end of last year, the company had delivered more than 60,000 used cars to customers in its distinctive covered vans since starting in December 2019 and in the first quarter this year generated revenue of £295 million, up 159% on the same period last year. So why is a company once worth $7 billion, according to its highest share price, now worth just over $1bn? “The relative severity of the fall is a reflection of the fact that investors now realise the emperor has no clothes on,” Steve Young, managing director of automotive retail analyst firm ICDP, said. “The original basis for the launch and subsequent listing of Cazoo was based on a poor understanding of the market.” For Autocar Business webinars and podcasts, visit Autocar Business Live Young and others in the car retail business believe that founder, entrepreneur Alex Chesterman, launched his business on the false belief that he could bring economies of scale to an industry that is famously fragmented. Chesterman regularly points out that no player in the used car business controls more than 3% of the market. Cazoo is targeting 5% long-term, which could make it the dominant force in used cars. The model is fairly simple. Chesterman, the brains behind property aggregator Zoopla and mail delivery movie club Lovefilm, has said his inspiration was US online used car operator Carvana (another business suffering in the current tech stock slump). Customers browse the Cazoo website, pick a car they want, and it gets delivered to their door. They have seven days to decide if they want to keep or return (Cazoo says just 5.2% of customers hand it back) and that’s it. The mechanics, of course, are much more complicated. Cazoo wants to control the entire process from sourcing the cars, refurbishing them and delivering them. Part of the reason it lost £550m last year was because it spent a fortune buying up companies to help it along its path, including reconditioning businesses SMH Fleet Solutions (£76m) and Smart Fleet Solutions Limited (£39m), vehicle data cruncher Cazana (£24m), online van retailer Vans 365 (£7.9m) and Italian online car retailer Brumbrum (€80m). Cazoo also spent big buying companies to fuel its car subscription ambition, including Cluno in Germany for £60m, Drover in the UK for £65m and Swipcar in Spain for £24m. As of April, Cazoo claimed 10,000 subscribers paying, in the UK anyway, between £329 and £1229 per month. “We view subscriptions as part of the future of the car market,” the company said in an annual report published on 5 May. One purchase has been seized on by detractors for seemingly going against the company’s stated aim of selling online only: the £24m addition of Imperial Car Supermarkets in 2020. Cazoo, however, has said this was bought for its vehicle refurbing centres, stock holding and collection points for the cars it bought. “The retained Imperial retail sites were repurposed as our customer centres,” it said in its annual report. Cazoo is a long way off its stated long-term aim to make a gross profit per vehicle sold of £3000, and even from its £900 target in 2021 after recording £124 in the first quarter. But then again this is a young business going through a cash burn to buy aligned properties and splurge on marketing to get its name better known (including sponsorship of Everton and Aston Villa football clubs). Its stock was probably overvalued and is now maybe underpriced. Chesterman himself told The Times recently investors dumping stock were reacting to an “irrational fear”. Time and future customers will ultimately judge whether Cazoo is the new normal for used car buying. Bright vs cloudy: Cazoo’s different takes on its future prospects Before Cazoo listed on the New York Stock Exchange last year, it presented a sunny pitch deck listing its many upsides versus the competition and enthused its potential investors with news that it was competing vigorously in ‘total addressable market’ in Europe worth £480m. This was essentially all the information Cazoo needed to give to list via the SPAC (or special purpose acquisition company) method whereby you merge into a company already listed for that purpose. On 5 May, however, Cazoo published a proper rundown of the risks investors face in the 20K form/annual report as required by the US Securities and Exchange Commission – and if you haven’t seen one of these before, it makes for pretty alarming reading. For example, in the risk section, you find this statement: “We have a history of losses and we may not achieve or maintain profitability in the future.” It also lists many other risks – eg the car companies themselves deciding to move aggressively into this space (a distinct possibility). These aren’t unusual statements to find on the 20K form (for foreign companies) required by the SEC, one reason why the SPAC listing process got a bad name for itself. Investors would have preferred to read these before a company lists, not afterwards. Given Cazoo’s recently spectacular dive in share value, many will be ruefully wishing the US listing process was a whole lot better managed.