| 2021 | 2022 | ||||||
| Price: | 6.90 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 33 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 227 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | -37 | EBIT | 0 | 0 | |||
| TEV (in $M): | 190 | TEV/EBIT | 0 | 0 | |||
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PartsiD Inc. is an intriguing microcap that went public via SPAC toward the end of 2020. Shares dropped nearly 40% almost immediately following the deal close, causing this to be a 'broken IPO' through today. While one can pinpoint some reasons for the discount, I believe the market is missing the strength of the business model and value proposition, the long growth runway, and potential for ID to grow into an all-in-one platform for parts and accessories. In addition, ID trades at a significant discount to its closest publicly traded comp in Carparts.com (PRTS) as well as brick and mortar retailers in Advance Auto Parts (AAP), AutoZone (AZO) and O'Reilly Automotive (ORLY). As a secular share taker growing faster than both the industry and competitors, I believe ID possesses a longer growth runway than peers, sports a better business model with no capital intensity or inventory risk, and is focusing on a niche part of the industry and specific customer segment that should insulate them from competition moving forward. Finally, a valuable technology platform that took over 10 years and nearly $100mm (management's estimate) to build provides a high barrier to entry for incumbents and other digital retailers to replicate.
Playing into my love for the microcap space is the relatively small amount of available information about the business and management team including zero writeups on any investment forums, one sell side analyst, and a limited IR presence. Publicly available filings include the SPAC registration statement, initial 10K and Q1 2021 call transcript. With less eyes on the business, a SPAC route to going public and microcap status, I believe we’ve stumbled upon a wide mispricing. Combine that with a ‘broken’ IPO, and I believe investors are able to purchase shares for a very favorable price, and one in which could see 100%+ returns on this position within the next few years assuming ID can hit my base case estimates for revenues and EBITDA.
Furthermore, I believe ID is currently being inappropriately viewed as 'just another auto parts retailer' which is incorrect, as they should be viewed through the lens of their differentiated model, with a niche focus that is a few steps removed from the brick and mortar customer base. Today, investors are paying just 10x EBITDA (growing 30%) for this growing share taker in a huge market with a long growth runway and unconstrained opportunity to become a one-stop-shop for all things auto parts and adjacent parts categories. This is a favorable setup that I believe could potentially return multiples of investors capital if management can execute.
Background
PartsiD went public via SPAC between Legacy Acquisition Corp. (sponsor) and Onyx Enterprises International (acquiree). Onyx is the founder / owner of CariD and related websites, and was converted to PartsiD following the SPAC to better align with the company's current value proposition and growth strategy. Onyx was founded in 2008, while Legacy Acquisition was formed in 2016. A venture capital firm (In Colour Capital) entered the picture in 2015 to provide capital and relationships to pursue the growth strategy, and following the deal both the founders of Onyx as well as the VC group have rolled 100% of their equity into PartsiD.
There are some current legal issues surrounding the founder's of Onyx / CariD and the current management team which I view as immaterial and describe in more detail below. Of note, following the deal close, in a move that will benefit current shareholders as well as the capital structure, 19.5mm outstanding warrants were either cancelled or converted into a smaller percentage of cash and common shares, the details of which can be found here. There are currently no outstanding warrants, and a small number of options as part of management's equity incentive program.
Business
PartsiD is an aftermarket auto parts retailer with a 100% e-commerce focus. The company has an extensive tech-enabled platform that aggregates complex, multi-dimensional parts data across various verticals (including motorcycles, RVs, power sport vehicles etc.) that has allowed them build a comprehensive parts database containing over 17 million SKUs. The company currently boasts over 8mm customers (based on purchases made between 2011-2021) and is attempting to disrupt the US auto parts market with a differentiated offering made up of the widest product selection in the industry.
Aftermarket auto parts fitment (auto part compatibility with a vehicle) is a complex problem when it comes to shopping online. While it's easy to walk into a brick and mortar auto parts store and get professional help, e-commerce retailers face challenges in this area in the form of needed customer service training, and wide product assortment (breadth and depth) with data needed to avoid shipping cost issues (returns and refunds) due to incorrect fitment. PartsiD has spent the past decade building out and refining their technology to provide solutions for these issues in the form of their platform. ID currently offers an easily searchable digital catalog with over 17mm SKUs, 1,000 product lines and more than 5,500 brands on top of AI-powered product recommendations and hundreds of resources in the form of videos, articles and reviews. To assist customers with their purchase decisions, customers can also chat with an expert or call customer service 24/7 for help with specific products.
PartsiD is attacking a specific customer niche and has focused their efforts on the less important (to traditional auto parts retailers) aftermarket 'wants' segment which consists of mostly performance and aesthetic accessories for the do-it-yourself enthusiast. ID's focus has been to provide the widest selection of products (17mm SKUs) and make the search and customer experience as smooth and easy as possible.
While the TAM for auto parts accessories is sizeable (more below), generally there are a few hundred thousand SKUs that drive most of the retail sales for aftermarket parts in the areas of failure and maintenance. Both brick and mortar and e-commerce retailers carry 100,000 - 200,000 SKUs (Carparts.com has around 830,000 per their latest reports), which are the SKUs that 'matter' for these businesses. These consist of things like batteries, tires, brakepads and various other failure related items. ID doesn't hold or focus on these 100k-200k items but is instead focused on the other 16.9mm SKUs that are less frequently purchased, and has engineered a business model that is profitable to attack this category. ID assumes no warehousing, carries no inventory, does no last mile shipping themselves, and dedicates no resources to service related work. It stands to reason that brick and mortar retailers are not able to profitably offer millions of SKUs, so in order to compete with ID, they would have to have both the product / fitment data, and also the full replication of the parts catalog.
Furthermore, traditional retailers complement their parts sales with service work (installation) and building relationships with repair shops in order to serve as a parts vendor to them. This is an incredibly important part of their business as repair shops and dealerships needs to source parts quickly, efficiently and correctly, so having a local brick and mortar presence all over the country is beneficial to source and maintain these types of relationships (and also leads to higher GMs for the brick and mortar players vs. ID). But as mentioned, ID is focused on a completely different customer segment / value proposition, which I believe should insulate them from having to compete with the AutoZones, O'Reillys and the Advance Auto Parts of the world, in addition to the likes of Amazon. In other words, they are playing a different game, and one in which I believe they can win by continuing to take share as a focused niche player within the industry.
Diving further into the niche, sales in the auto afterparts market can typically be divided into three categories: failure related (a component is no longer working), maintenance (typical wear and tear) and discretionary items (accessories for performance or aesthetics). Failure related parts sales drive the majority of industry sales, where companies like AAP, AZO and ORLY focus on both retail and service work. As a result of the high level of failure related transactions, consumers in this area can generally be categorized as relatively price insensitive and requiring rapid access to parts/components and high service levels (This runs counter to PartsiD, whose customers require the precise part and fitment, but can afford to - and are willing to - wait a few days for fulfillment). The third category, discretionary, is where CariD is choosing to streamline and focus, and despite plenty of competition and what would seem like low barriers to entry (you can get some car accessories at your local grocery store), the brick and mortar players don't pose a threat to online focused retailers. I'd estimate that the TAM for this market segment is around $20 billion, lower than the total Specialty Auto and Equipment TAM of $46 billion (management's number), but still significantly above ID's $400mm in revenues. This provides a significant runway for growth nearly 50x the company's TTM revenues.
To fulfill customer orders, ID uses a just-in-time inventory / dropship model by partnering with over 1,000 vendors along with subject matter expert customer service teams who are on call. As a result, ID warehouses no products, holds no inventory and assumes no shipping duties. This is where the business model truly differentiates itself: not only has ID built these vendor relationships (another barrier) allowing them to source parts effectively and efficiently, they also boast an asset light model that requires minimal capital to grow and is financed by customer deposits and solid vendor payment terms such that working capital serves as a source of cash. This translates into very high EBITDA to free cash flow conversion and eliminates all inventory risk for the company. This is reflected in part by the small amount of inventory held on the balance sheet and the minimal inventory purchases needed to grow revenues.
I believe the time and resources invested in the technology platform and fitment data provides a solid first mover advantage as well as a very high barrier for competitors to overcome. In the past five years, ID has seen their SKU count triple, and today they are able to onboard a new product category within one month. This extends to the adjacent parts markets as well consisting of motorcycles, RVs, boats and power sport vehicles.
While there are parts of the aftermarket auto parts business that are recession resistant (customers who need failure-related parts won't push that aside when the economy isn't doing well as they still need to get to work, get around etc.), the accessories market can be subject to cyclicality and is less resistant. ID however has seen minimal cyclicality / seasonality (aside from sales bumps during tax refund season), and boasts an average order value of $250 dollars, allowing them to maintain profitability from a customer's first order. While ID's gross margins remain low due to sourcing costs, SG&A is largely fixed and advertising is a variable costs so the potential for operating leverage down the road isn't difficult to imagine.
Moving forward, the growth strategy will be focused on product cultivation, attacking new verticals, pricing optimization, new geographies and diversifying marketing spend. Of note, product cultivation has started to take shape as ID now offers tire installation services where customers can shop for tires on CariD.com and at the same time choose a local installer, book an appointment and have ID ship the tires directly to the shop.
Industry and Competition
At first glance, it would be foolish to assume that ID can compete with the network density and logistical capabilities of the Advance Auto Parts, AutoZones and O’Reillys of the world, not to mention Amazon. However I believe incumbents haven’t dedicated the resources to compete with ID's specialty niche, nor are they able to replicate the SKU catalog or business model as selling additional 100,000s of parts would require significant upfront investment in warehousing and inventory capabilities. In addition to the decade plus time period to build out the technology stack, ID works with over 1,000 vendors in order to be able to source parts effectively and offer the exact SKU, at the right price, for each specific vehicle.
ID differentiates its DIFM offering from the traditional brick and mortar experience primarily through a much better selection which leads to a better shopping experience (which could then lead to more volume leading to cost savings on the purchasing side). As mentioned above, ID doesn't stock parts, but instead they have agreements with 1000+ shops across the US whereby ID acts as the marketplace, rather than the direct seller. Focusing on the 'wants' versus 'needs' items means that ID can carry more SKUs than brick and mortar retailers as well as focus on selling brand name products, perceived as higher quality than in house brands carried by brick and mortar retailers.
The automotive digital marketing agency Hedges & Co. projects online sales of auto parts and accessories in the U.S. will be around $19 billion by 2022, with an annual growth rate of 14 percent to 16 percent. E-commerce revenue for auto parts reached $16 billion in 2020 and the non-failure related accessories segment should continue to grow in line with historical trends. The 2022 estimate for industry size wouldn't be difficult to imagine.
Today, the percentage of auto parts being purchased online remains low at around 5% of total industry sales as compared to a product category like furniture which is around 30-35% and electronics around 40-45%. There are a number of factors causing the low penetration rate including product complexity (leading to poor fitment data), the do-it-for-me crowd that typically buys parts and service together, and lack of brand awareness for viable brick and mortar alternatives. I believe ID has solved for the lack of fitment data problem, and as their brand awareness increases, they will be able to capture much of the incremental demand from increased ecommerce penetration. Currently, ID spends around 8-9% of revenues on advertising.
According to industry insiders, the majority of auto parts consumers do some form of online research prior to making a purchase decision. This digital influence is part of what ID is attempting to capture with their search capabilities and customer experience, as the breadth and depth of information combined with correct fitment data and 24/7 expert help provide better alternatives to other e-commerce retailers and brick and mortar stores that may not carry a specific part. This can be reflected in ID's return rate metric of around 5%, compared to industry return rates in the range of 18-23%. For brick and mortar stores, heavy fulfillment and warehousing costs (allowing them to only hold a small number of SKUs) combined with lack of inventory data leads to the inability to satisfy these long tail searches for customers.
As a result of the above, the rise in digital influence leading to more online purchasing behavior combined with increased brand awareness for ID should bode well for future share taking and top line growth.
Marketing and Brand Awareness
Anyone who has ever searched for aftermarket parts online can attest to the flood of choices and information available, which can make searching complex and time consuming. This dynamic - as well as the SKU catalog and fitment data - benefits ID as they are the only e-commerce retailer with extensive product data on every part including product and fitment information. This is important as consumers (and car tinkerers) do a lot of online research consisting of searching for a part and then verifying the fitment on retailer and manufacturer websites. Industry insiders revealed that nearly 70% of all searches for car parts are made up of 'long tail' searches. This includes a search with multiple words, phrases or specific parts information i.e. '2017 jeep grand cherokee left headlight bulb'.
The focus on long tail searches not only as a business model but as an SEO strategy makes sense for ID given the amount of data they've collected throughout their technology platform. These types of searches can be categorized as lower volume, but higher conversion as finding exactly what you need through specification will most likely cause the search to stop at that end point. The importance of reducing complexity and optimizing for fitment information can't be understated, as a retailer's website with say 50,000 SKUs can easily have hundreds of thousands or even millions of variations in search terms with fitment information. As a result, most online retailers are missing out on their share of these long tail searches (they do not have their websites structured with correct search engine optimization to show up for these search results) which instead send consumers to discussion web sites, YouTube, or you guessed it...PartsiD.
For ID, about 75% of traffic to their site comes from Google / Bing, which is beneficial as they can offer the most specific search categories / terms which allow them to stand out from an accessory search standpoint. To date, ID has been able to scale with minimal marketing spend (as a % of revenues) so increased efforts in this area should allow for higher site sessions and conversion rates. Moving forward, there's been talk about increased and more focused ad-spend, developing a loyalty program to cater to repeat customers, and continuing to exercise dominance within SEO.
Management
To start with the outstanding legal issues (because how can we have a microcap SPAC without some hair on it??) CariD Founder Roman Gerashenko and former CEO Stanislav Royzenshteyn have an outstanding lawsuit against venture capitalist Prashant Prathak, Chairman of PartsiD.
At a high level, the lawsuit is as follows: Stanislav Royzenshteyn and Roman Gerashenko formed Onyx Enterprises in 2008 and were its sole shareholders and directors until 2015. That year, in exchange for a capital investment in the business, Royzenshteyn and Gerashenko agreed that Prashant Prathak and Carey Curtin would become majority shareholders and directors of Onyx. Pathak, through his private equity firm Ekagrata Inc., and Carey formed In Colour Capital, Inc. (ICC), and Onyx Enterprises Canada, Inc. (OEC), to facilitate the capital investment. Royzenshteyn and Gerashenko claimed to have agreed to the terms of the deal because Prathak allegedly assured them that Canadian Tire Corporation (CTC), a multi-billion-dollar Canadian company with which Prathak had influence, agreed to acquire a stake in Onyx. CTC never did.
Following the closing, Royzenshteyn and Gerashenko became minority shareholders in Onyx, with OEC owning the majority of shares. Disputes arose shortly after the transaction closed in July 2015. Royzenshteyn and Gerashenko are also claiming among other causes of action that Prathak committed legal and equitable fraud in the inducement, securities fraud, breach of fiduciary duties, minority shareholder oppression, and interference with plaintiffs' prospective economic relations. Royzenshteyn and Gerashenko sought rescission of the transactional agreements and a return to the status quo before the transaction, plus compensatory and punitive damages. They have not received either.
In addition to a general denial, Prathak filed a counterclaim asserting, in part, breach of contract, and seeking an accounting, imposition of a constructive trust, and forced sale of Royzenshteyn and Gerashenko's Onyx shares to OEC, or conversely, Royzenshteyn and Gerashenko's forced purchase of OEC's shares in Onyx, or the forced sale of Onyx to a third-party buyer, and other relief. This also did not happen.
As it stands today, the court has repeatedly ruled against Gerashenko and Royzenshteyn (as they signed a legal agreement in 2015 with consent), and I believe the completion of the SPAC transaction (that the court allowed it to happen) is a good litmus test for how things may proceed moving forward. In addition, both Gerashenko and Royzenshteyn own nearly 40% of the business today, providing them with significant financial involvement and signaling at least on the surface that they should want the business to do as well as possible. In February of 2021, PartsiD filed for a summary judgement seeking to dismiss the case. While I don't believe the lawsuit or potential damages to be material, I am working on uncovering more information. Details of the case can be found here.
Royzenshteyn resigned in July 2020 clearing the way for current CEO Antonino Ciappina, previously the Chief Marketing Officer for Onyx / CariD, to take the helm. Previously, Ciappina was the Senior Director of eCommerce and Digital Marketing for Foot Locker. While this is his first run as CEO of a public company, I believe him to be intelligent and capable enough to run the business. Of note, Ciappina took a 30% pay cut from the former CEOs >$1.0mm salary, and receives very limited RSUs or options and the ability to earn both equity and incentive comp with the achievement of certain KPIs tied to revenue growth and website metrics. In addition, the company has stock ownership guidelines in place for 2.5x base salaries for the CEO and 1.0x base salary for other executive officers, with five years to achieve the target. CFO Kailas Agrawal previously worked with Preshant Prathak at In Colour Capital.
While a rookie management team might give some investors pause, the group has a good understanding of the opportunity in front of them and how to execute, as they communicate thoughtfully about the business, and seem to be directionally driving value where they should. As product focused people, I think capital allocation moves should be monitored and scrutinized closely, but I believe this group is capable of handling this unlevered balance sheet and doing smart things with any excess cash. My conversations with the group indicate they are focused on driving brand awareness, increasing product depth and expanding further into new verticals.
Valuation
ID generated around $15mm in EBITDA for the trailing twelve months against an enterprise value of $190mm. I believe an asset light e-commerce business with negative working capital, growing its top line (normalized) around 20%, with a clean balance sheet, aligned management and valuable technology (not to mention a better, more scalable business model than incumbents) is most likely worth more than 12x EBITDA.
Because COVID (at least temporarily) accelerated the shift from brick and mortar spending to online purchasing of auto parts, it would be difficult to claim with any confidence that the recently printed growth rates of 30-40% are sustainable. With consumers back to work, rent payments no longer deferred, and the end of unemployment / stimulus money, I'm assuming that we see some sort of normalized growth rates for the business moving forward. Pre-COVID, with the exception of 2018-19 due to heavy sales tax levys, ID was growing in the 18-30% range. This compares to GDP+ like growth for the industry as a whole, around 3-4%. Management has stated many times that COVID permanently shifted consumer behavior in this category, so I can at least assume that some of the COVID spending habits / shifts will stick. With that said, my bull case highlights management's guided 20% revenue growth through 2024, with EBITDA growth above 30% and margins expanding due to operating leverage and as ID enters into new verticals. Were ID able to hit $830mm in revenues by 2024 with 6% EBITDA margins, a 10x multiple on $50mm in EBITDA would reflect a $15 stock.
The more conservative base case calls for 17% revenue growth through 2024, capturing post-COVID deceleration, and only slight EBITDA margin expansion over the next few years. In either scenario, its possible that ID can generate anywhere from $37-50mm in EBITDA by 2024. Applying a very conservative 10x EBITDA (assuming multiple does not expand) would result in a stock price between $11 - $15/share, significantly higher than today's price of $6.90.
The bear case would consider significantly reduced revenues due to an inability to scale / take share, and near zero EBITDA growth with EBITDA margin declines of nearly 30% (a scenario I view as incredibly unlikely). In this scenario, 8.5x 2024 EBITDA would result in a $4.5/share target, or 35% below today's price. Furthermore, I believe the downside is protected by the technology stack and strong balance sheet.
**Notes on Valuation / Estimates
Given the asset light nature of the business and negative working capital model, EBITDA converts to free cash flow at a high rate and can be used as a fair proxy. In addition, I believe its at least possible for ID to approach $1 billion in revenues within the next 5-6 years, at which point I believe EBITDA margins could approach 6-6.5% on the back of further operating leverage and the entrance into new verticals. Were that to happen, the valuation becomes even more interesting. Using the same 10x EBITDA multiple on the low end of the EBITDA margin range would result in a stock price of $18/share.
Further highlighting the mispricing is CarParts.com (PRTS), ID’s closest publicly traded competitor, currently valued at 1.6x revenues and nearly 80x EBITDA, without the scalability nor potential operating leverage that ID possesses. PRTS stock is up over 100% in the past year alone, while ID trades at 0.3x revenues and 10x EBITDA. Were ID to re-rate closer to peer valuations investors would be looking at a $13/share stock or 100% upside at just 1.0x TTM revenues. Furthermore, with the potential in a base case scenario to generate around $40mm in EBITDA within the next few years on a return to pre-COVID revenue growth and only slight margin expansion, that would put the valuation based on today's price at 4x EBITDA. Currently, ID trades as if it’s a broken business with minimal growth prospects and low returns on capital. I believe the setup is favorable, and I’m comfortable seeing how management can execute against their opportunity set.
**Serving as another sanity test pointing to undervaluation is AutoZone's purchase of ecommerce focused retailer AutoAnything. AZO purchased AutoAnything in 2013, making an initial cash payment of $115 million. Under the terms of the deal, AutoZone offered an additional $30 million in contingency payments if the online retailer met operating income targets, but the company missed those goals. AutoAnything was sold to a private equity firm just five years later and dismissed as 'a very small business overall' by AZO management. AutoAnything failed to reach profitability, indicating at the very least that ID may have developed a better mousetrap in terms of their business model. Given a choice between paying $145mm for a capital intensive, unprofitable online retailer or PartsiD with an enterprise value of $160mm...serves to illustrate the mispricing further.
Risks / Mitigants
Management's first rodeo - the new management team has never run (as CEO / CFO) a public company before. The prior experience isn't bad, and I believe they are operating thoughtfully and thinking about the business in the right ways, yet ID is somewhat of a 'show me' story.
Uses of excess cash - in line with the above, management has not quite laid out clearly what they plan to do with excess cash generated from the business other than enter new verticals or streamline marketing spend.
Large shareholders in an illiquid stock - I believe this could act as more of a tailwind as they would need an exit either in the form of increased stock price or sale to a strategic.
Large shareholder lawsuit - benign as far as lawsuits go, and I don't believe material financial damages needed to be expended by ID. Please see the details above.
Growth decelerates significantly post-COVID - even a return to pre-COVID growth rates and stable margins would result in value creation, without taking into account any operating leverage or benefit from more effective marketing or growth in other verticals.
TAM isn't as big as my / industry estimates - I've significantly reduced my TAM for valuation purposes, which differs widely from company and industry estimates.
Private equity takeout at a low price - a new risk that I believe I need to think through given the surplus of capital available and ability to borrow money at near zero rates.
Competition for Ad Words heats up resulting in increased costs - ID has shown to be dominant in SEO and fitment data. I believe their core customer will continue historical purchasing patterns despite increased competition.
Large SKU catalog / long tail SKUs have little value - who is buying the remaining large number of SKUs that the brick and mortar guys aren't selling?
Continued growth / cash flow
Multiple expansion during re-rate
Increased IR efforts
Expansion into new verticals
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