Cazoo listing

Cazoo is an e-commerce company looking to disrupt the UK and European second-hand car industry through its digital-first proposition. Founded in 2018 by serial entrepreneur Alex Chesterman, OBE, Cazoo buys used cars then sells them to consumers through its online marketplace.

In a recent investor presentation, the firm identified a £500 billion market opportunity across the UK and Europe.³ Sales growth since its website launched in December 2019 has been remarkable. Cazoo generated around £37.5 million in revenue in February 2021, which translates to an annual run-rate of £450 million - an impressive feat after just 15 months in business.

Cazoo believes that they can capitalise on the rise of e-commerce and consumers becoming increasingly likely to make big-ticket purchases online. Since February 2019, online sales as a percent of total UK retail sales have risen from 19.2% to 34.6%, largely driven by consumers forced to go the online route during the pandemic.⁴ What’s more, according to a report from CarGurus, 64% of UK consumers say they would now buy a used car online compared to 36% pre-Covid.⁵ At present, just 2% of used-car sales are thought to be made online compared to 52% for consumer electronics.⁶

Gaining trust among consumers will be key to winning business from traditional car dealerships. The used-car industry is often considered a marketplace with high asymmetric information: where sellers have more information than buyers. Cazoo’s 95% 'great' or 'good' rating on Trustpilot suggests they are doing a respectable job so far. Another stand-out statistic from Cazoo’s investor presentation was the average car ownership period of just 3.5 years. If accurate, it implies an opportunity for repeat sales among loyal customers.⁷

However, competition is strong and there are several companies operating a similar business model in the UK and Europe. Start-up firm Cinch also buys cars to sell directly to consumers online, while the well-known, UK-listed Auto Trader connects buyers with car dealers through its website.

Central to Cazoo’s pitch to investors is its technology, which it says will help deliver industry-beating profit margins in the future. This includes its demand-led purchasing algorithm, which ensures that it’s buying the right vehicles to meet current demand and its digital marketing capabilities that target potential customers.

As of April 2021, Cazoo is still heavily loss-making, as its costs of sales currently matches its revenue. It has also spent big on marketing to boost brand recognition among consumers, including the sponsorship of Premier League football teams Aston Villa and Everton. Revenue was expected to be £162 million for 2020, instead the company incurred an operating loss of £88 million. Management expects its EBITDA margin to gradually improve before turning positive in 2024.

The combination of high revenue growth, large operating losses and that it is a technology-oriented business has led to the decision to go public in the United States instead of on the London Stock Exchange (LSE). With respect to the success of high-growth companies listing on the LSE, Chesterman has previously stated that 'US investors understand better businesses investing in the short term for future growth.'⁸

The IPO is priced to give Cazoo a market cap of around $7 billion, which seems eye-watering considering the company last raised capital in October 2020 at a valuation of $2.5 billion. Cazoo says this valuation is justified given their latest forecast for revenue-growth rates and improving operating margins.

The table below compares Cazoo to two other used car e-commerce companies that are also listed in the US.*

*Cazoo’s 2020 sales figure is an estimate from the company. CVNA and VRM 2020 sales figures are actuals. Cazoo 2021 and 2022 sales figures are estimates from the company’s investor presentation.

Cazoo is predicting that they can grow 2020 sales by close to 18 times by 2022. This is a much faster rate than Carvana (a similar proposition in the US that went public in 2017) have been able to achieve.

But since its IPO, Carvana’s share price has soared over 2250% giving it a current market cap of $48 billion. Investors will be hoping that Cazoo can replicate this share price performance after going public.

If Cazoo can achieve its ambitious growth targets and its price-to-sales ratio converges to a level between that of Carvana and Vroom’s current price-to-sales multiple (8.5x and 4.7x, respectively); a market cap in the region of $19 billion could be achieved. This would suggest a possible 170% upside on its expected IPO price if all goes perfectly to plan.

That said, ambitious growth forecasts that are made by companies going public via a SPAC are coming under increased scrutiny. The US securities regulator is said to be considering new guidance for growth projections that are made by blank-check companies.⁹ Investors should scrutinise any growth assumptions that are made by these type of companies before investing. However, they will need to believe that management can deliver on their revenue forecasts and expectations of becoming profitable within the next three years.