Value Investors Club / HYRECAR INC (HYRE)

Description

HYRE Car (HYRE) $3.63 Stock Recommendation Feb. 17, 2020

The sharing economy is disrupting many industries. In the past most consumers owned their home,

owned their car, and owned their clothing. They were the only ones that used their possessions. Today

innovative companies such as UBER, Airbnb and Rent A Runway are allowing consumers to rent items

that in the past were purchased. HYRE Car is one of those new entrants that allows used cars to be

rented on a short term basis by auto dealers.

The auto industry is going to dramatically change over the next decade with the help of software and

the internet. Fewer Americans are going to choose to own their vehicles and far more will seek to save

money by using a car on a rental or subscription basis. At the same time car owners will rent their cars

just as Airbnb is allowing them to rent their apartments or houses to earn extra income from assets that

are underutilized. McKinsey forecasts that the number of used cars that are rented will grow at a 30%

CAGR over the next five years. Goldman Sachs forecasts that demand for ridesharing will continue to

grow at a 40% compounded rate for the next five years.

Company Description:

HYRE Car has an asset-light business where used car dealers or consumers own the car. HYRE provides

the software platform that matches used car owners with those seeking to rent a car. The original

business model was to match individual car owners with consumers that wanted to rent a used car for

a few days or hours at prices that were lower than Hertz or Avis. Growth was not rapid and it was very

expensive for HYRE to add one car at a time to its fleet of used rental cars.

The HYRE Car business hit a positive inflection point in October 2018 when HYRE realized that used car

dealerships had vehicles they could rent for weeks versus hours. The dealers also owned dozens of cars

versus only one, so HYRE could grow its fleet of used rental cars more rapidly. In a years time or by

September 2019, used car rentals from auto dealers went from generating zero sales to 70% of sales at

HYRE Car.

HYRE has a cloud based software platform/marketplace “ Dealer Connect” that auto dealers use to

make their cars available for rental. It is also the same platform where consumers can search for the

make and model car they wish to rent and find the most convenient location to pick-up the car.

Used car rental revenue at HYRE grew +61% year over year in 2019. HYRE Car is growing far more rapidly

than Avis or Hertz for a few reasons. First daily rental rates for used cars are lower than for the brand

new cars that Avis and Hertz offer. Second, HYRE is renting cars mostly to gig economy employees that

are using the rental cars to earn a living.

Every month over 50,000 Americans apply to work as drivers for UBER or Lyft. To my surprise over

20,000 of these job applicants do not own a car, and need to find a car to work for the ride sharing

companies. As a result thousands of these gig economy workers searching for an affordable car rental

find their way to HYRE Car’s web site.

HYRE is in an enviable position where demand for used car rentals far outstrips its supply of cars. HYRE

generates over 50,000 monthly leads for car rentals, but rents under 4,000 cars monthly. The problem

is that HYRE has only signed up 300 auto dealers that have about 3,000 used cars available for rent.

This is a great problem to have where demand exceeds supply, but it is still a problem. HYRE Car is

making progress. The company did preannounce sequential sales growth of +30% in the Dec 2019

quarter.

Reasons That Auto Dealers Will Rent Used Cars:

Auto dealers can more than triple their profits per used car by working with HYRE Car. It is

commonplace for a dealer to sell a used car for $10,000 and make a $500 or 5% gross profit on the

transaction. This low gross margin is normal. The retail auto industry is very competitive and operates

on razor thin pre-tax margins of 3% in good times and loses money during recessions.

The HYRE Car “Dealer Connect” platform in Tier 1 & 2 cities is directing leads to auto dealers that result

in a 90% utilization rate for used cars that are in the rental fleet. On average the auto dealers are

generating rental rates of $28.50 per day or $770 monthly at a 90% utilization rate. If the used car is

rented for three months the dealership can generate over $2,300 in rental revenue. Thus is a huge

boost to the typical $500 gross margin auto dealers might earn from selling the car. In one third of HYRE

rental contracts the gig economy driver will buy the used car from the auto dealer. In most cases the

auto dealer will still make a $500 gross margin on the used car as vehicle values are more closely linked

to the model year, than cumulative mileage.

HYRE Car’s auto dealer used car rental business is still in its infancy. The company has signed up 300

dealers and there are over 48,000 car dealerships in the United States. HYRE’s challenge is to get auto

dealerships to trust a company they have never heard of. In February 2020 the likelihood of dealers

trusting HYRE materially improved. COX Automotive works with over 35,000 auto dealers in the USA

and entered a partnership with HYRE Car. Cox via Clutch Technologies will introduce HYRE to 240 Clutch

dealerships that could rent 3,600 used cars with HYRE. Rental cars from Clutch on the HYRE platform

would more than double the number cars that HYRE could rent.

Another opportunity exists with the auto OEMS. Ford, Mitsubishi and a European luxury OEM are all

engaged in pilots with HYRE Car. The OEMs are piloting extended test drives, where consumers at the

end of a lease are allowed to test drive a more expensive car in the hopes that they will sign a new lease

with a higher priced vehicle.

Reasons That Consumers Will Rent Cars From Auto Dealers

In the past if you wanted to rent a car you would contact Hertz or Avis. In the future more consumers

will seek to rent cars from their local auto dealers. The first reason is that the auto dealers can offer

lower daily rental prices compared to Hertz since the dealers are renting used cars. A new 2020 Toyota

Prius list price is $25,000, but a 2016 Toyotas Prius is worth $15,000. This 40% lower price allows the

auto dealers to rent cars at lower rates than Hertz. Auto dealers also have more convenient suburban

locations to pick up and drop off cars versus Hertz where most of its car inventory is located at airports.

Gig economy workers will also need commercial auto insurance which HYRE Car provides. Your standard

Hertz car rental agreements do not allow the renter to use the Hertz vehicle to work for UBER or

Grubhub.

The Competitive Environment Is Getting Easier

UBER and Lyft have been the most direct competitors for HYRE Car. In order to grow more

rapidly, both companies had been leasing new cars to drivers that did not own cars. UBER was

losing money in this activity via its venture named FAIR.com, but until recently this was not an

issue. UBER and Lyft combined are forecasted to lose over $11 Billion in 2019 and still lose $5

Billion in 2020. In their efforts to reduce losses both companies are severely curtailing the

purchase of cars for new drivers. FAIR.com had leased 15,000 cars to UBER drivers, but in

October 2019 headcount at FAIR.com was reduced by 75%. As a result new UBER and Lyft

drivers need to find cars elsewhere. Clearly some of them are renting cars from HYRE’s auto

dealer partners, since HYRE pre-announced a 30% sequential increase in sales for the Dec 2019

quarter.

UBER still needs new drivers to grow sales and will be looking outside the company for help in

providing new drivers with cars. As a result UBER may pay HYRE $200 for every car rental

contract where the customer becomes an UBER driver. Such an agreement could add $1/share

in value to HYRE relatively easily. In this scenario HYRE would introduce 1,000 drivers quarterly

to UBER (1,000 drivers *$200 finder’s fee * 4 quarters divided by 16 Million shares = $0.05 EPS

* 20 P/E = $1/share in value).

Financial Forecasts:

HYRE Car lost $10 million in 2019 as the company is building the foundation for a much larger

company. The company generates 63% gross margins and most of the operating expenses

(G&A plus R&D) are relatively fixed. Sales and marketing expenses should grow much slower

than sales as most of the rental car leads are free. In fact leads grew over 100% year over year

and nearly all were generated organically.

At 10,000 daily vehicle rentals, and $25 daily revenue per vehicle, HYRE would generate $90

million sales/year. At a 20% operating margin and 21% tax rate, HYRE Car would earn $0.90 EPS.

If you place a 20x P/E on EPS then HYRE Car’s stock price could reach $18/share in a few years.

The key driver to accurately forecasting results for 2020 and 2021 is knowing how many used

rental cars are added to the HYRE Car Dealer Connect platform. Rental demand exists right now

for HYRE to double its sales, but the company has a shortage of used car inventory to rent.

HYRE would only need to add 75 new auto dealers that list 40 cars each to add 3,000 rental

vehicles to the existing fleet of 2,100 daily rentals. The cars will be added, but the question is

when?

The sales pipeline for adding new rental car supply is encouraging. HYRE has identified over

3,000 cars that could be added to the fleet in the near term. Over a one year time horizon auto

OEMs such as Ford or Mitsubishi could add thousands of vehicles.

If we assume that sales grow +70% year over year to $25 million in 2020, then HYRE Car is

valued at 1.72 EV/Sales.

Valuation Is Much Higher At Peers:

There are numerous peer to peer PRIVATE car rental companies. As a ZoomCar shareholder I have

access to the information below:

ZoomCar is an Indian based peer to peer car rental startup with $31 million sales and $13 million in

gross profit dollars in the Fiscal Year ended April 2019. At its most recent funding round, ZoomCar was

valued at $350 million or 11x times last 12 month sales and 25x its gross profit. HYRE Car at these

valuations would be worth about $12/share based on 11x trailing sales and $15/share at 25x trailing

gross profit.

TURO is a USA based peer to peer used car rental business focused on the leisure rental market, not gig

economy workers. The company was valued at 6x times (GMV) Gross Merchandise Value in December

2018. At this valuation, HYRE Car would be worth just under $6/share. In July 2019 Barry Diller’s

Interactive (IAC) invested $250 Million in Turo.

So we have an unusual situation today where private companies are being assessed at a higher

valuation than a public peer in a similar business.

RISKS:

Competition:

There are a number of new well funded competitors renting cars such as FAIR.com, FlexDrive,

GetAround and Turo. The weakness in most of these business models is that the competitors

own the vehicles, versus HYRE Car where they are building a marketplace as the matchmaker

between the buyer and seller. We are already seeing the flaw in these business models

resulting in substantial layoffs at FAIR.com and GetAround.

The Take Rate Could Decline:

HYRE receives 45% of the gross payments made from the rental car contract. In return HYRE

provides the auto dealers with the software platform, rental leads and commercial auto

insurance coverage. There is always a risk that a new competitor could enter this market with a

lower take rate.

Rental Car Leads Could Decline:

HYRE generates over 50,000 leads monthly and this number grew organically over 100% year

over year. These organic leads show the strong demand for car rentals outside of the legacy car

rental brands such as Hertz and Avis.

If organic leads at HYRE declined, the cost to operate the business would rise materially and

impair profits.

Will Auto Dealers Succeed With HYRE Car?

There is no guarantee that HYRE will be able to scale its business from 2,000 → 5,000 daily

rentals in the next 18 months and maintain a 90% utilization rate on the car rental fleet. So far

HYRE has maintained a high rental utilization rate in large cities like Chicago, but utilization

rates are lower in cities with smaller populations. Auto dealers with low rental car utilization

rates will be disappointed. HYRE also has to provide satisfactory customer service and support,

and has not proven that they can scale this part of their operations.

Conclusion:

HYRE Car has only been focused on renting used cars with auto dealers starting in September

2018. The economics for auto dealers to rent used cars is compelling, so I would expect a surge

in the number of dealers signing up with HYRE Car.

HYRE already has 50,000 monthly rental car leads that it can direct to future auto dealer

partners, but the supply of rental cars is only about 3,000 vehicles. At some point this demand

can lead to 10,000 daily car rentals which could generate $90 million in annual sales and $0.90

EPS. Stock market investors do not recognize this potential, but I would expect a strategic

investor like Cox Automotive to be interested in acquiring HYRE Car. They should be willing to

pay a premium to 1.72 EV/sales, when transactions for private peers have been at much higher

levels.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Sales growth is directly linked to adding additional supply of used cars that are available for rental.

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			2020	2021
Price:	3.63	EPS	0	0
Shares Out. (in M):	16	P/E	0	0
Market Cap (in $M):	56	P/FCF	0	0
Net Debt (in $M):	-13	EBIT	-8	-5
TEV (in $M):	43	TEV/EBIT	0	0