Summary
On 15th March, Shift delivered another record-breaking quarterly report with Q4 2021 sales and margins coming ahead of guidance.
Despite guiding for some softness in Q1 results, Shift’s management is looking at another year of rapid growth in 2022, with significant improvement in operational margins.
On the earnings call, Shift’s management expressed confidence in its path to profitability and its ability to attract investors.
Softbank is financing Shift’s $20M acquisition of Fair’s dealer listing marketplace, and it is also an equity investor in Shift now. This is a great sign of confidence in Shift’s business and management team.
Shift’s stock is trading at net cash levels, i.e., the stock is pricing in bankruptcy. With a clear path to profitability, Shift is a mispriced security, and I am more bullish on it than ever.
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LazingBee/iStock via Getty Images (Note: This report was published to Beating The Market on 18th March 2022. At the time of writing, the stock was trading at less than $2, and despite its big move (+18.92%) on Friday, it is still in deep value territory.) Introduction
Shift (NASDAQ: SFT ) is now trading at ~$2.5 per share ($225M in market cap), which is roughly 1.8x the net cash on its balance sheet. It is fair to say that the market is pricing Shift for bankruptcy. We discussed Shift’s cash burn situation (bankruptcy risk) in great detail after the Q3 report, and you can find the discussion here .
For those wondering why Shift is one of my favorite moonshot bets, I urge you to read my investment thesis shared in this note . Although Shift is risky, it is a rare, viable ~100x opportunity. Today, we will briefly skim over Shift’s quarter and spend most of our time on understanding Shift’s path to profitability (shared by management in Q4 investor presentation). Let’s begin. Quick Review Of Shift’s Q4 Earnings Report
With continued supply chain pressures inducing inflation, the pricing environment in the used-car industry remained robust in Q4 2021. On the back of this strength, Shift generated record revenues of ~$195M (up 167% y/y) in the last quarter, and we are almost through Q1 2022, so the company’s gui de of $205-215M is really actual numbers. In my view, Shift is performing well, and its share price action is absolutely ridiculous. Shift Q4 2021 Shareholder Letter In addition to strong unit sales, Shift’s gross profit per unit was robust in Q4 (considering seasonal weakness). For Q1 2022, Shift’s adj. GPU guidance of $1500-1600 may seem weak, but this is just a result of price rise normalization in the used-car industry (and seasonality). The attach rate for ancillary services is improving, and as such, Shift expects to record adj. GPUs of 2200+ in this year. In my opinion, the top-end of revenue and unit guidance of $1.1B and 38,000 units is conservative and sets up the company for a series of “beats and raises” in 2022. Overall, Shift’s Q4 was in-line with our expectations from the company, and I am happy with the reported numbers. As Shift continues to scale revenue, it is delivering operating leverage as evidenced by narrowing (highly negative) EBITDA margins. For 2021, Shift’s adj. EBITDA margin came in at -22% vs. -37% (figure from 2020). In 2022, Shift’s management expects this margin profile to improve significantly from -22% to a range of -12% to -15%. While Shift is years away from breakeven (and FCF generation), the business is scaling up rapidly and simultaneously improving operational efficiencies. After undergoing some managerial upheaval in the last few quarters, the company seems to have settled on the executive leadership team of George Arison [co-founder, CEO], Oded Shein [CFO], and Jeff Clementz [President] – people with experience of growing e-commerce businesses. Along with Q4 results, Shift’s management released an investor presentation that outlined Shift’s path to EBITDA breakeven. Let’s study this multi-year plan and its feasibility. Analyzing Shift’s Path To Profitability
According to Shift’s management, the company could achieve EBITDA breakeven on an adjusted-basis at annual revenues of $3B (100,000 e-commerce unit sales) with adj. GPU reaching the $3800 to $4000 range. To achieve these figures, Shift needs 3-4 years of 50%+ sales growth and consistent improvement in margin profile. Shift Q4 2021 Investor Presentation Shift’s EBITDA breakeven model is based on scale, innovation (ancillary products and services), and […]
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