8:24 am, May 4, 2022
Cazoo CEO Alex Chesterman has blamed the fall in Cazoo shares on an ‘irrational fear’ in the stock market.
After listing for $9.38 in August last year as the biggest ever Nasdaq debut for a British firm, the used car retailer closed 13 per cent down yesterday – or 86 per cent down on the original listing – for just $1.40 following its Q1 results yesterday.
It’s gone from its debut value of $7bn (£5.6bn) to a market cap today of just $1.06bn (£849m) in less than nine months.
Speaking to the Times, Chesterman said: ‘I can give you a lot of names that have been hit harder than we have.
‘That is just the nature of investors’ views around high growth and risk today, versus some point in the past or the future.’
And he’s right, American online used car retailer Carvana, who Cazoo has largely modelled its business on, has seen even more dramatic falls. In the last six months shares have fallen by 80 per cent, and if you’d invested in the business in January they’d be worth around a quarter of that value today.
However, experts are betting they will fall even further with Forbes going as far as to say the shares are ‘under shorted’.
Yesterday, Cazoo released its first quarter report for 2022 and ‘investors are nervous’, says Zeus Capital head of research Mike Allen.
‘We’ve seen gross profit per unit (GPU) going backwards since Q4, people are asking about the whole of 2022 and Cazoo didn’t give any financials,’ he said.
‘They’re also talking about the UK break even point being in two years and that’s a long time for people to wait.’
Unlike Carvana, Cazoo did sell 3,388 more units in Q1 than Q4 of 2022 and this was up by just under 10,000 cars compared to the same period last year. And while a large part of its sales acceleration has come from wholesale units, the increase in retail units sold was higher than wholesale in the first quarter of 2022 compared to Q4 2021.
The gross profit per unit on these retail cars seems to have been slashed to achieve this though, at £124 per unit for Q1. While only 19 per cent down on the same period in 2021 it was close to half of Q4’s £233 per unit and even further from the celebrated GPU for the whole of 2021 of £427.
While Chesterman might call it an irrational fear, there’s more in Cazoo’s filing history – or lack of – that has investors worried as they received a notification on Monday (May 2) night of its ‘inability to timely file all or part of an annual report of form’.
In Cazoo’s prospectus published with the Securities and Exchange Commission in October 2021, just over a month after it listed, it highlighted the ‘material weaknesses’ in its own business that could lead to exactly this.
It wrote: ‘We have identified material weaknesses in our internal control over financial reporting (ICFR), and we may identify additional material weaknesses in the future which may result in material misstatements of our financial statements or cause us to fail to meet our reporting obligations.
‘If these material weaknesses are not remediated or we otherwise fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.’
Cazoo gave the reason that ‘the compilation, review and finalization of the information required to be presented in the report could not be completed within the prescribed time period without unreasonable effort or expense’ and has now been given a 15-day extension.
In his interview with the Times, Chesterman said these investor fears will fade though and commented that the markets tend to swing between fear and exuberance.
He said that they market ‘always tends to swing too far in one direction or the other. I think last year there was a bit too much of the irrational exuberance in some of these hi-tech names. And I think today the opposite is the case.’
David Kendrick, partner at UHY Hacker Young, commented: ‘Whilst we are not necessarily aware of any specific issues with regard to Carvana or Cazoo’s business models, the recent share drop has to be a serious cause for concern.
‘The wider markets are of course down due to some of the worldwide events ongoing, however no where near to the extent of these two businesses.
‘Is the market losing faith in their model perhaps? Supply shortages and vehicle supply meaning targets can’t be met? Huge losses vs record dealership profits?
‘There are many influencing factors, however it certainly doesn’t look in a great position as we speak!’
