News & Analysis

Call it a 'tech' business and along comes a massive IPO!

Andrew Saks, Monday, 24 May 2021

What's the difference between a traditional car dealership, and a car dealership that sells used motors via a website?

Not much, you may scoff, apart from that surely it would be preferable to be able to go and view the used car that is about to consume a large sum of money as cars are among the most expensive consumer durables ever bought, and when buying used it is always prudent to carry out a significant inspection.

Brand new cars are flying out of the showrooms at the moment, especially in Britain where there has been a 453% increase in new car registrations in April compared to March, however there is still clearly enough of a used vehicle market to create a very interesting scenario that has got market commentators from traders to hedge fund managers talking.

It seems that if any firm offering any service wants to raise capital, be it via a round of equity-based venture capital funding or via a public listing on a prominent stock exchange, all it has to do is call itself a 'tech' business.

Car dealerships are not tech businesses. Car manufacturers very much are, but dealers are not. They are sales outlets for conducting sales, leasing and finance deals, and for allowing prospective buyers to view stock, take test drives and negotiate discounts on new or used vehicle models.

The only thing 'tech' about Cazoo is that its interface with customers is via a website rather than a bricks and mortar showroom. On that basis, almost anyone can claim to be 'tech' these days, thus undermining genuine technology firms. It would be banal to suggest that a hair salon which offers reservations via its website is a 'tech' business, so therefore why is a car sales site considered 'tech'?

This week, the forthcoming IPO of online used car sales company Cazoo Holdings LTD is the subject of scrutiny.

Two months ago, the firm released its plans to go public on the New York Stock Exchange (NYSE) under the ticker symbol AJAX via a blank-check Special Purchase Acquisition Company listing which values the company at an astonishing $7 billion.

Cazoo is a relatively new entry to car sales, and according to one particular commentator in the form of HedgeSync founder Mel Sutton "This is a bonkers valuation - they have sold 25,000 cars since Dec 2019 - that's less than 50 cars per day and it's been valued at $7 billion."

Mr Sutton said today "Glasgow business Arnold Clark sells about 250,000 cars a year generating more than £4 billion in revenue. Ah but Cazoo doesn't have showrooms, it's a tech business. When was the last time those buying Cazoo bought a used car?"

"Since July '20, 93% of Arnold Clark's sales have had an online element. Since Nov '19 there have been 170k downloads of their app. 41,000 cars have been reserved via the "reserve for £99" offer on their website and they've bought over 30,000 cars from online users who have utilized the online valuation tool. I bought a car recently from them and I chose to pick the car up, otherwise, it would have been 100% online" continued Mr Sutton.

"That's just Arnold Clark - the majority of dealerships have similar capabilities. Cazoo's gross profit (Q1 2021) was £3.5 million, Arnold Clark's was £117 million for 2019 . London investors don’t understand tech like Americans...that's why we chose NY! LOL!" he quipped.

"SPACs gone crazy... Disruption is radical change - this isn't a radical change" he concluded.

Investment firm digital marketing executive Mark Churchill picked up on this and said "Have bookmarked this post, interesting to see how it plays out. As you rightly note Cazoo is profitable, has an extraordinary revenue growth rate, is building a recognisable brand, has an executive team experienced in high growth and has international ambitions."

People stopped comparing .com start-ups to Google 10+ years ago. Google was built on a mission to solve some major global problems such as the organisation of information, I'm unsure a 2019 Ford Focus is going to do that to the same extent. Yes, it is early days for Cazoo, however, their current thinking is now to open retail stores to "showcase" cars, what next, salespeople?

This is one of the interesting debates that companies looking to list their stock via SPACs create, as SPACs bypass the standard due diligence procedures normally associated with listing a company for public share sale on an exchange, thus valuations can be very high.

The company has not yet proceeded with its IPO, but it is continuing to progress toward becoming a listed company.

There is a well worn adage that everything is cyclical. If the comparisons between the listing of stock via SPACs in which everything declares itself a tech company and the dot com boom of over 20 years ago can be taken as an example, those cycles are every 25 years or so.

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