Investments In AI And Dealer Networks Will Drive Future Marketplace Volumes

Key Takeaways

• Strategic investments and enhancements, including AI features and stronger market insights, aim to boost customer outcomes and drive higher auction fees and margin expansion.
  
• Increased dealer resources and improved transaction efficiency through streamlined processes are expected to drive revenue growth and net margin improvements.
  
• Macroeconomic uncertainties, lease volume challenges, competition, execution risks, and asset sales could impact OPENLANE's revenue, growth, market share, and profitability.

Catalysts

Operates as a digital marketplace for used vehicles, which connects sellers and buyers in the United States, Canada, Continental Europe and the United Kingdom.

• The expected increase in new lease originations, which are projected to flow through OPENLANE as they mature in 2026 and beyond, is anticipated to boost future marketplace volumes, positively impacting revenue growth.
  
• The narrowing equity gap between off-lease values and residual lease values suggests that fewer leased vehicles will be paid off at maturity, resulting in increased marketplace volume, which is expected to improve revenue and profitability.
  
• Investments in one app to streamline buying and selling processes are likely to enhance the customer experience and engagement, potentially increasing transaction volumes and supporting net margin improvements.
  
• The strategic decision to further accelerate investments in the U.S. dealer-to-dealer market, including more sales and marketing resources, is expected to drive growth in dealer volumes, boosting revenue and earnings in the next several years.
  
• The company's innovation pipeline, including enhancements in AI-enabled features and deeper market insights, aims to deliver better outcomes for customers, which may lead to higher auction fee earnings and margin expansion over time.

OPENLANE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OPENLANE's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $189.2 million (and earnings per share of $0.9) by about March 2028, up from $49.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, down from 46.5x today. This future PE is lower than the current PE for the US Commercial Services industry at 29.8x.
• Analysts expect the number of shares outstanding to decline by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

OPENLANE Future Earnings Per Share Growth

Risks

• Macroeconomic uncertainties, including a strengthening U.S. dollar, could create translation headwinds, impacting OPENLANE’s revenue from Canadian and European operations.
  
• The anticipated challenging year for commercial off-lease volumes in 2025, due to low lease originations in 2022, may lead to lower marketplace revenues and constrain growth prospects.
  
• Increasing competition in the digital auction space, coupled with potential tariff impacts on vehicle values, could pressure OPENLANE’s market share and profitability.
  
• Potential execution risks in integrating new technologies and altering app experiences might lead to dealer confusion or dissatisfaction, potentially affecting customer retention and transaction volumes.
  
• The sale of non-core assets, like the automotive key business, while simplifying the model, removes revenue streams which could require time to offset with new or enhanced marketplaces.

Valuation

• The analysts have a consensus price target of $24.143 for OPENLANE based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $189.2 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $21.41, the analyst price target of $24.14 is 11.3% higher.
  
• 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.