Shifts To Direct Sales And Automation Will Shrink Margins

Key Takeaways

• Shifts in consumer behavior, automation, and direct transactions threaten to reduce ACV's transaction volumes and erode its value as a third-party auction provider.
  
• Competitive pressures, heightened regulation, and economic headwinds risk squeezing margins, increasing costs, and curbing revenue and earnings growth.
  
• Strong adoption of innovative services and technology is driving growth, expanding market share, and improving operational efficiency, positioning the company for sustained margin expansion.

Catalysts

Provides a wholesale auction marketplace to facilitate business-to-business used vehicle sales between a selling and buying dealership.

• The accelerating shift of automakers and consumers toward direct-to-consumer models and away from traditional vehicle ownership, combined with rising adoption of car subscription and sharing services, threatens to structurally reduce the volume of used vehicles entering wholesale channels, which could produce long-term declines in ACV Auctions' transaction volumes and revenue.
  
• Investments in AI and automation throughout the auto industry, including the growth of self-inspecting vehicles and platforms facilitating direct buyer-seller connections, risk disintermediating third-party auction providers like ACV, likely resulting in declining gross margins and pressure on earnings as their value proposition is eroded.
  
• Escalating regulatory scrutiny around vehicle sourcing, emissions standards, and transaction transparency is expected to increase compliance costs and operational complexity, which could sap operating leverage and lead to margin contraction, especially as ACV attempts geographic expansion and physical infrastructure build-out.
  
• Persistent economic uncertainty, weak used vehicle supply, and ongoing trade retention by dealers-who are increasingly holding onto vehicles rather than auctioning them-are likely to keep unit growth and transaction-based ARPU under pressure, suppressing top line revenue growth below historical levels.
  
• Intensifying competition from established digital and traditional auto marketplaces with larger ecosystems and greater capital resources may force ACV to lower its take rates or increase investments in ancillary services, resulting in diminishing profitability and stalling earnings growth over the long term.

ACV Auctions Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ACV Auctions compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ACV Auctions's revenue will grow by 18.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -9.1% today to 4.1% in 3 years time.
• The bearish analysts expect earnings to reach $48.5 million (and earnings per share of $0.3) by about September 2028, up from $-64.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 54.2x on those 2028 earnings, up from -31.2x today. This future PE is greater than the current PE for the US Commercial Services industry at 26.9x.
• Analysts expect the number of shares outstanding to grow by 2.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

ACV Auctions Future Earnings Per Share Growth

Risks

• Rapid adoption and integration of AI-driven tools and data services-including ACV's proprietary pricing, inspection, and guaranteed sales solutions-are enhancing dealer engagement, increasing conversion rates, and enabling differentiated high-margin offerings, which could drive long-term revenue growth and margin expansion.
  
• ACV is successfully expanding its ancillary services such as ACV Capital, ACV Transport, ClearCar, and ACV MAX, with record quarters and strong adoption among top dealer groups and even strategic partners like Amazon, indicating the potential for cross-sell, ARPU growth, and increased operating leverage over time.
  
• Geographic and segment expansion via investments in greenfield commercial remarketing centers and the build-out of a commercial wholesale platform significantly expands ACV's total addressable market, supporting sustained top-line growth as these channels scale.
  
• ACV's ongoing market share gains, focus on product innovation, and ability to attract both dealers and commercial partners point to the possibility of continual growth in transaction volume and fee-based revenues, particularly as macro headwinds subside.
  
• The company is demonstrating strong cost discipline, operational efficiency gains, and adjusted EBITDA margin improvement-supported by scalable technology and a robust cash position-which together increase the probability of sustainable earnings growth and improved net margins over the long term.

Valuation

• The assumed bearish price target for ACV Auctions is $11.53, which represents two standard deviations below the consensus price target of $19.73. This valuation is based on what can be assumed as the expectations of ACV Auctions's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.5, and the most bearish reporting a price target of just $11.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $48.5 million, and it would be trading on a PE ratio of 54.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $11.66, the bearish analyst price target of $11.53 is 1.2% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.