Linus @ Mars 2022
Powerband Solutions is one of the most interesting cases I have found recently.
The company has lots of areas that can and should be investigated. For this write-up, the ambition is a short exposition with a focus on what I believe to be the most significant parts in terms of valuation, risks, and potential. A good introduction and review of Powerband are given by Desjardins Securities here.
Powerband Solutions is a Canadian company operating in the US. The company is developing a multi-dimensional marketplace online called Drivrz, providing consumers and dealers with streamlined buying and selling solutions for the automotive industry. Drivrz is made up mainly of three business units, DrivrzFinancial, DrivrzXchange, and DrivrzLane. Another unit, Drivrz Commercial Fleet, is also in the works, but farther into the future and will not be covered here.
DrivrzFinancial (DF) is a fintech platform providing credit and leasing solutions for the automotive industry. Initially, the focus has been on leasing for used cars and electric vehicles. So far, a system for used-car leasing has been released. This solution is integrated into the two major computer systems used by 85–90% of all car dealerships in the USA. Once a dealership is onboarded by Powerband, it can offer used-car leasing to its customers without any additional technical integration. The leasing process is streamlined—the dealer is notified in seconds if a customer is approved by DF's automatic decisioning system.
DF receives a transaction fee to originate the lease as well as fees for managing the loan. Powerband has partnerships with financial institutions, often so-called credit unions, that assume ownership of the vehicles being leased. This means that Powerband never assumes any asset or credit risk. Credit unions also benefit from being able to use tax arbitrage that reduces the cost of funding. The average transaction fee is around $4000.
DF is beneficial for all parties involved:
For its leasing services, the company has secured credit lines of more than two billion USD that can be securitized and renewed several times per year if needed.
DrivrzXchange (only 50% owned by Powerband) is a marketplace for all types of sellers and buyers (wholesale, retail, and consumers). The goal is to deliver a secure and streamlined experience for anyone looking to buy, sell or auction cars online. All users' identity is verified, reducing the risk of fraud and spam typically associated with C2C sales. Further, DrivrzXchange (DX) sits in the middle of C2C transactions handling the transfer of money and ownership between sellers and buyers.
DX enables dealers and other sellers to reach a much larger audience by showcasing their inventory to the entire market. Buyers will correspondingly benefit from a much larger supply than can be found locally.
DrivrzXchange will charge a fixed fee of US$350 per transaction. However, the majority of revenue generated might still come from leasing as DX is integrated with DrivrzFinancial, allowing buyers to use its financial services.
At the time of launch, DX will support sales to consumers. But more buyer types are being added, allowing consumers to sell directly to dealers and dealers to sell to other dealers (single cars and in bulk). Through third parties, DX will offer a shipping service, where the vehicle is picked up at the seller and delivered to the buyer. It will also be possible to have the car verified and serviced by a third party before the delivery. My understanding is that these additional services will not be available at the time of launch.
DX has been live in a pilot in Arkansas and Nashville during the fall. Initially, the launch was planned for Q4 2021. After an early evaluation of the ongoing pilot, it was decided that further development and optimizations before launch would be strategic. Roll out has been pushed to start Q1 2022.
DrivrzLane (DL) is a digital retail solution, connecting dealers, buyers and finance sources online. Dealers will be able to list their inventory. Buyers are given a digital shopping cart and can complete the entire purchase online, or perform part of the transaction at the physical dealership. DL is integrated with DF for financing and integrated with DX enabling dealers to showcase their inventory there. This will help populate DX with inventory, helping the marketplace to gain traction.
DL is sold as a SaaS to dealers with a monthly fee of US$1000-2000. The launch is planned for this quarter.
DrivrzXchange and DrivrzLane are challenging to assess and value because of significant unknowns regarding future traction and revenue. To simplify valuation, I will ignore these solutions for now and pretend that the company consists only of DrivrzFinancial.
Strengths and potential
I view DrivrzFinancial's future as very promising, with limited medium-term risks and massive potential, mainly due to the following reasons:
1. Huge untapped market
Around 40 million used-car transactions are made every year in the US alone (half of which are made through dealerships). The market is fragmented with mostly low-tech players and a large number of brick-and-mortar dealerships. While leasing is very common for new cars, it is all but non-existent for used vehicles. Yet leasing for used cars should appeal to consumers due to several advantages, e.g., no upfront payment and lower monthly payments than other credit options. Powerband is an early mover in this space and competition is lacking. The company's revenue guidance for 2022 is based on facilitating less than 10.000 originations (0.025% of used car transactions in the US). For an innovative disruptor with a better solution than the competition, there should be plenty of room in the market for multi-year strong growth, even if several competitors emerge. Since Powerband's solution works with dealers, helping them increase revenue and improve customer retention, there is an excellent opportunity to capture a considerable share of the market quickly.
Beyond the US, the company's goal is to expand its solutions worldwide. Launch in Canada is imminent and after that more countries will follow.
2. Verified product-market fit
DF should be an easy pitch for dealers as it helps them increase revenue, save time and improve customer retention (lower CAC over time). Further, since DF is already integrated with the systems used by ∼85–90% of dealerships in the USA, the bar for onboarding new clients is low. Strong demand among dealers has, in my opinion, been verified by the current year's sales and dealer signups.
3. Highly scalable
DF is a highly scalable and capital-light solution. Unlike its competitors who compete with existing dealerships, Powerband can leverage the dealerships and their customer networks to grow rapidly at a low cost. Once Powerband has onboarded a dealership, not a lot of work is typically needed by Powerband to facilitate originations. The gross profit margin for DF is around 50%.
4. Tech advantage
DF has its own proprietary lending operating system (LOS), a key differentiator versus peers that rent off-the-shelf products. Owning the LOS facilitates making adjustments and further development (might be important for vertical integrations). Competitors who need their own LOS will likely spend years in development, as well as fulfilling numerous state licensing requirements.
5. Further opportunities
Powerband is also focusing on providing finance for electric vehicles. They currently have a $2B+ credit line aimed at helping OEMs provide leasing for their customers in the USA.
Another exciting opportunity is Powerband's partnership with CB Auto. CB Auto is an organization with the goal of providing its 33+ million members (historically union members) with guidance and help related to purchasing cars. Around 3 million car transactions are made annually. Powerband bought a minor stake in CB Auto, and their solution has now been integrated with CB Auto to provide its members with used-car leasing. Only a tiny fraction of CB Auto's transactions need to use the leasing solution to generate massive revenue for Powerband. The launch is planned for this quarter together with DrivrzXchange.
I believe that most of Powerband's value comes from its potential for massive future earnings in the medium and long term. But these are almost impossible to quantify and value. A feasible and more conservative approach is, in this case, to base valuation on this year's revenue and earnings. Unfortunately, estimating the current year's revenue is also difficult since it largely depends on what happens with the present macro headwinds. Still, let's use the company's own guidance (which has been put forth considering some lingering headwinds).
The company is guiding for 2022 revenue of $70-$90M and an EBITDA margin of 20-25%. The fully diluted enterprise value is approximately $170M, giving EV/S ≈ 2 and EV/EBITDA between 8 and 12. Ignoring expected revenue from new solutions (DX + DL) and valuing the company solely on contributions from DF, we reach a 2022 valuation of DrivrzFinancial alone of EV/S ≈ 2.5, and EV/EBITDA between 9.5 and 13.5.
Regarding DF potential beyond 2022, management has communicated a goal of 3 originations per dealership per month, with 2000 active dealers. This translates to a monthly revenue of more than $20M. It has been hinted that this goal is for sometime in 2023.
Given DrivrzFinancial's multi-year growth potential, the valuation seems very attractive. Since no assumption has been made about the success of DX and DL, we may consider them great optionalities free of charge at the current stock price. Only 1% of all car transactions in the US are made online, so the opportunity for DX and DL should be considered significant. If the integration between DF, DX, and DL is successful, the potential is even greater. Everything I have seen so far indicates that the management knows what dealers, consumers, and lenders need, and that their solutions will fit the market well.
Even though there is a small risk that DF is not as good as it seems, almost all signals indicate that once the macro headwind disappears, DrivrzFinancial will be very successful. To me, the success of Powerband is very close to being a question of when, rather than if.
Management and owners seem to agree that the outlook is bright and that the stock price is too low since they have bought stocks heavily in the open market lately.
Supply shortage, high used-car prices and inflation
I consider these factors to be the most significant short-term risks for Powerband. If conditions worsen, sales might drop entirely for a while. This would probably force the company to seek additional funds for its operation.
Has DrivrzFinancial been proven?
Looking at the number of originations generated, it appears the adoption among signed dealers is progressing slowly. And it seems that a small fraction of dealers are responsible for a large part of all originations. This raises the question of whether many dealers are dissatisfied with the service for some reason. It is probably too early to rule out this risk. However, several signs are positive, indicating that the risk probably is small:
Around 1500 dealerships have been signed so far.
According to the Powerband CEO, churn among dealerships is very low (only a few have stopped using DF).
Submitted leasing applications have continued to increase sequentially month over month (e.g., January 2022 12% higher than the previous month).
Technology and services not being strong enough
Management seems to have a strong track record in most critical areas, but I have not been convinced about their strength in technology and software development. Usually, it is possible to find personnel on LinkedIn. I have not been able to find many Powerband employees on LinkedIn. For DL and DX to be successful, having streamlined and polished technology is critical.
Management has not yet proven that they ace execution, especially in the area of technology. They also missed their 2021 guidance.
New business verticals may fail
The success of DrivrzXchange is dependent upon gaining and sustaining some amount of traction. Achieving this can be very difficult and/or costly. That said, I believe the chosen go-to-market strategy is clever and has a good chance of succeeding.
I don't consider competition a significant risk for Powerband as TAM is large enough for many competitors. In my opinion, the likelihood that a single competitor will overtake the entire market in the short to medium term is very low.
Carvana: Very capital intensive as they own the inventory; cannot sell both new and used cars; no used-car leasing. The company has recently communicated that it will invite third-party dealerships onto its marketplace, allowing the dealerships to list their inventory. Is there a risk that Carvana is able to grab Powerbands market? The risk exists, but TAM can easily support multiple large players. This is not a big concern to me for the next few years.
CarLotz: Also capital intensive. Does not currently offer used-car leasing. There is unofficial/unconfirmed information that CarLotz will start using DrivrzFinancial's solution for used-car leasing.
Vroom: Also capital intensive. Cannot support consumer listings. Does not offer used-car leasing.
Upstart: Offers loans to consumers in a range of areas. Is ramping up loans for new car purchases. Lacks the other parts of the Drivrz solutions.
E Inc: Canadian E Inc offers solutions for B2B wholesale of vehicles, as well as offering dealers customer-facing webshop solutions. Interesting to note regarding valuation and comparison to Powerband: at the time of the IPO in November, they had a market cap of approx $1B CAD, and are projected to do around $150M CAD in revenue in 2022.
Management and culture
The management seems to have lots of knowledge and experience related to the general auto market, car dealerships, and financing and insurance. After having listened to them on a number of occasions, my impression is that they know what dealers, consumers, and lenders want and need. They also seem to be innovative and capable of executing, but this remains to be seen.
Management and insiders own approximately 45% of the company. Founder and CEO, Kelly Jennings, owns more than 20%. He and the DrivrzFinancial CEO Jon Lamb have been buying decent amounts of shares in the open market the last couple of months.
I do not yet grasp the company's culture as well as I would like. But the management team is very always helpful and polite during calls and seem down to earth. Hopefully, this rubs off internally.
Why does this opportunity exist
I believe several factors contribute to making the Powerband stock mispriced:
Macro headwinds have hidden the strengths and potential in DrivrzFinancial.
It is still relatively undiscovered and trades on the smaller Toronto Venture Exchange.
Currently a broad sell-off in tech and growth.
Missed guidance for 2021 and lowered guidance for 2022.
This case is uncertain in the short term due to macro headwinds that might linger for a while. Impatient investors might not stomach waiting for macro to improve.
Things to track going forward
The most important factor in mitigating risks going forward is, in my view, that DrivrzFinancial is able to gain traction. If the solution is as good as it seems, it should be able to do so easily under improved macro conditions. Improved macro conditions should result in a substantially increased number of leasing applications and originations.
The launch of DrivrzXchange and DrivrzLane will be very interesting to follow. But as the launch is soft, early numbers might be of limited use for gauging future performance. I am hoping for positive signals but will not be too worried if traction is lacking early on.
More important is the integration between the DF, DX, and DL. Once launched, I will try to evaluate how successful these integrations are; e.g. if DX is generating originations for DF.