Over the last six months, ACV Auctions’s shares have sunk to $7.30, producing a disappointing 16.4% loss - a stark contrast to the S&P 500’s 9% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in ACV Auctions, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is ACV Auctions Not Exciting?
Despite the more favorable entry price, we’re cautious about ACV Auctions. Here are two reasons we avoid ACVA, plus one stock we’d rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
For online marketplaces like ACV Auctions, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification.
ACV Auctions’s unit economics are far below other consumer internet companies, signaling it operates in a competitive market and must pay many third parties a slice of its sales to distribute its products and services. As you can see below, it averaged a 27.3% gross margin over the last two years. That means ACV Auctions paid its providers a lot of money ($72.67 for every $100 in revenue) to run its business.
2. Poor Marketing Efficiency Drains Profits
Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like ACV Auctions grow from a combination of product virality, paid advertisement, and incentives.
It’s very expensive for ACV Auctions to acquire new users as the company has spent 81.8% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between ACV Auctions and its peers.
Final Judgment
ACV Auctions’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 14× forward EV/EBITDA (or $7.30 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of ACV Auctions
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