Traditional Rentals Will Suffer Despite Moderate EV Upside

Key Takeaways

• New mobility options, technology-driven competitors, and shifting consumer preferences are eroding demand for traditional car rentals, challenging revenue and market relevance.
  
• Significant and ongoing investment needs for fleet electrification and digital upgrades are increasing costs, further pressuring margins and profitability.
  
• Innovation in premium services, autonomous and electric vehicle partnerships, and disciplined investments position Avis Budget Group for profitable, diversified growth in the evolving mobility ecosystem.

Catalysts

Provides car and truck rentals, car sharing, and ancillary products and services to businesses and consumers in the Americas, Europe, the Middle East and Africa, Asia, and Australasia.

• The rapid acceleration of electric vehicles and alternative mobility options like ride-hailing and car-sharing is structurally eroding demand for traditional car rentals, which will likely lead to significant pressure on the company's core revenue base over the long term.
  
• Continued urbanization and investments in improved public transit systems are reducing the necessity of personal or rented vehicles in major metropolitan areas, threatening recurring revenue streams for Avis Budget Group as its urban markets shrink.
  
• The persistent shift among consumers-especially younger cohorts-towards highly digital, on-demand, app-based mobility platforms is creating a secular disadvantage for large incumbents like Avis that still rely on legacy rental models, lowering pricing power and compressing net margins over time.
  
• The necessity for ongoing, substantial investments in electrification, fleet upgrades, and technological infrastructure-under regulatory and competitive pressure-will drive up capital expenditures, compress net margins, and increase depreciation and financing expenses, with few assurances of a commensurate increase in long-term profitability.
  
• Intensifying competition from asset-light, technology-first entrants such as Turo and peer-to-peer car-sharing platforms is structurally deflating industry profitability and could impair both top-line growth and return on assets for Avis as those models reach further scale.

Avis Budget Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Avis Budget Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Avis Budget Group's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -19.1% today to 4.2% in 3 years time.
• The bearish analysts expect earnings to reach $512.2 million (and earnings per share of $15.14) by about August 2028, up from $-2.2 billion 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 9.6x on those 2028 earnings, up from -2.4x today. This future PE is lower than the current PE for the US Transportation industry at 25.2x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Avis Budget Group Future Earnings Per Share Growth

Risks

• The launch of Avis First, a premium concierge service targeting the higher end of the rental car market, demonstrates successful innovation and customer segmentation, which could drive a meaningful uplift to average revenue per day and expand net margins if uptake mirrors the premiumization seen in the airline sector.
  
• The Waymo partnership and Avis's expanding focus on autonomous and electric vehicle fleet management position the company at the center of the long-term growth in mobility-as-a-service, supporting future revenue streams far larger than the current car rental total addressable market, and enhancing the company's core competency in mega fleet management.
  
• Strategic investments in EV infrastructure and technology-driven process improvements are modernizing fleet operations, promising both enhanced customer experience and improved operating efficiencies, which can translate to stronger earnings and solid free cash flow even as industry standards evolve.
  
• Robust global scale and existing infrastructure in over 180 countries give Avis unique leverage to win further strategic partnerships, serve the expanding digital mobility ecosystem, and diversify revenue geographically, reducing reliance on any one market and supporting stable top-line growth.
  
• Management's consistent discipline around free cash flow generation, margin-accretive growth initiatives, and thoughtful partnership selection suggest that new ventures are being structured to enhance-not dilute-profitability and earnings power, even as the company invests in long-term secular trends such as connected vehicles, premiumization, and autonomous mobility.

Valuation

• The assumed bearish price target for Avis Budget Group is $105.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Avis Budget Group'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 $200.0, and the most bearish reporting a price target of just $105.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $12.1 billion, earnings will come to $512.2 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $153.71, the bearish analyst price target of $105.0 is 46.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.