Shares in Cazoo (NYSE: CZOO) have fallen by more than 95% in the last year. Cazoo is a high growth company and the current valuation is really cheap. But the problem is that there are many risks involved in investing. in Cazoo, and there is a real possibility that the company will go bankrupt. I’d like to introduce you to the risks and opportunities associated with that investment so you can assess for yourself if Cazoo is worth investing in.
What is Cazoo?
Cazoo’s mission is “We want buying your next car to be no different than ordering anything else today.” The company was founded in 2018 by alex chestermanwho is CEO and owner 23.37% of the entire company. Cazoo buys used cars, then repairs them, and then sells them for a higher price than he bought them for. Cazoo simply sells used cars. This is how the company makes its money.
The company initially operated only in the UK, then grew to Italy and Spain, but recently Cazoo announced that it was leaving all operations in Europe and would now focus only on the UK, where it was more profitable for them. This is, in my opinion, a smart move by the company’s management. The company estimates that the total addressable market is in excess of £100 billion in the UK. The company’s long-term target market share is greater than 5%. The market opportunity in used cars is really huge.
You can see that customers really like Cazoo as the company has over 28,000 reviews on trustpilot and it has 4.7/5 stars.
Why are stocks down more than 95% in the last year?
There are several reasons why there has been such a huge drop in CZOO stock price over the past year. The first, of course, is high inflation in the United Kingdom. But the reason high inflation is so bad for Cazoo is that CZOO has really low margins.
Interest rates are also rising with high inflation, which is not good either. In fact, Cazoo is losing money, and is projected to be until 2025. Investors have been interested in selling fast-growing, big-loss companies for the past year. Cazoo falls into exactly that category.
The war in Ukraine caused the company’s shares to plummet further as the price of oil rose and with it the price of fuel. People therefore drive fewer cars because it is more expensive. This is definitely not good news for CZOO. In general, the current macroeconomic situation in the UK is certainly not favorable for a company like Cazoo. These are the main reasons why Cazoo shares have fallen so much in the last year.
Since its inception, Cazoo has increased sales by hundreds of percent. This rapid growth is expected to continue in the future. Now, I would like to introduce you to some of the strategies that CZOO will use to keep growing.
The first is definitely keep increasing brand awareness in the United Kingdom. The company currently estimates that it has a UK brand recognition of over 80%. When a new customer thinks of buying a car, he may think of Cazoo selling quality used cars. Increasing brand awareness is definitely a smart move for further growth.
Increasing the number of CZOO’s in-house reconditioning capabilities is another growth strategy. The company is currently able to repair more than 120,000 cars a year from its current eight locations. If they increase the number of these locations, it will definitely contribute to further growth of the company.
Cazoo, of course, wants to keep increasing the number of retail units sold. This will be done primarily through advertising. For a higher profitability of the company, it will be important to increase the Gross Profit per Unit (GPU). This will be achieved primarily through more car purchases, directly from consumers, and more efficient car repair. These are some of the strategies that Cazoo will use for further growth and it is estimated that in 2022 CZOO will increase sales by 92%.
Financials for the third quarter of 2022
Now let’s take a look at the financials of the company in the third quarter of 2022. Cazoo had sales of £347 million this quarter, an increase of 103% YoY. That’s very fast growth in sales. The company sold 23,775 cars in the UK this quarter, an increase of 82% year-on-year. Retail GPU was £488 this quarter, which is £313 less than the same quarter a year earlier, as the company’s retail GPU was £801 in Q3 2021. This decrease in GPU YoY definitely It’s not good news. The company’s UK gross profit was £10m. This is a decrease of £1 million from last year.
But the biggest disappointment for me personally was the UK gross margin. This was only 3%, which is 3.7% lower than the same quarter of the previous year. The lower Gross Margin compared to last year is mainly due to a much worse macroeconomic situation. But management said they will now focus much more on higher profitability.
The company currently has a strong cash position of £308m and self-funded inventory of over £150m. Based on guidance for the fourth quarter of 2022, management expects the retail unit sales growth rate to exceed 100%. Management also expects a significant improvement in UK retail GPU and continues to expect the company to be cash flow positive before additional external capital is needed. That is positive news.
Rating of Cazoo
The current CZOO valuation is cheap. The company trades at Price/Sales of 0.17x. Price/Sales was much higher a year ago. Here you can see that many things can change in the market in one year. This must be taken into account for any investment. The price/book of the company is currently only 0.43x.
That’s really low, and the company is now trading for less than it is now in cash. CZOO forward price/sales, it’s only 0.15x. The company could turn profitable sometime between 2025 and 2026, according to analyst estimates. Whether Cazoo will actually be profitable, only time will tell, and at this point no one knows for sure, because there is a real risk that the company will go bankrupt by then if it fails to become profitable.
Cazoo has many risks, the main ones I would like to present to you now. The first risk that CZOO currently has is that the company has very low margins. While management is working on the problem, it’s certainly not ideal at all, especially with the current record high inflation in the UK. Therefore, it is necessary to monitor the fact that the company’s margins are increasing.
The second risk for CZOO is the current bad macroeconomic situation. In the current situation, people can wait to buy a car until the macroeconomic situation improves and there is less uncertainty everywhere. This is definitely not good news for a company that sells used cars like Cazoo. Competition is also a risk that investors should definitely not overlook.
And perhaps the biggest risk facing the company right now is its lack of profitability. This is definitely not good in the current macro environment. Analysts estimate that the company will not be profitable for at least three years. While company management says Cazoo is doing well with its current cash position and won’t need any more outside financing, it’s certainly not something they’re all that confident about. These are the top 4 risks that Cazoo has right now, and investors need to remember that there is a real risk of the company going bankrupt.
Cazoo is a fast growing company run by its founder. The company’s current valuation is cheap, but there are many risks that investors need to be aware of. The main ones are the current poor macroeconomic situation and the company’s lack of profitability. With Cazoo, there is a real risk of it going bust. This is something that I think investors should be aware of. However, returns at this price could be in the hundreds of percent. Overall, I think Cazoo offers high risk and also high reward, but I certainly wouldn’t recommend investors holding CZOO as some sort of larger portfolio position.