Autobytel: 50% Upside in Sight

Autobytel Inc. (ABTL, Financial) is a technology company that belongs to the industry of internet information providers. The company is involved in the provision of automotive marketing services to automotive dealers and manufactures. The company generates leads for dealers through its consumer facing website that assists potential car buyers in their purchases. On the consumer side, the company provides research data and information for buying a vehicle. Autobytel was founded in 1995 and is based in Irvine, California.

Revenue classification

The company’s primary source of revenue is lead generation, including internally generated and non-internally generated leads. Autobytel sells the leads both directly to dealers and indirectly through lead distribution networks. The company mainly uses a monthly subscription or per-lead-based pricing to monetize its services. In certain instances, the company follows a pay-per-sale pricing model. Autobytel also generates revenue from advertising on its website.

Autobytel’s Annual Report 2016, Revenue Classification

Regarding customers, the largest customers of the company include Urban Science Applications, General Motors (GM, Financial) and Ford (F, Financial). Autobytel generated 28% of its revenue from these three customers in 2016; Urban Science Applications accounted for 16% of the company’s total revenue in 2016. The company showed double-digit revenue growth over the past three years. See the graph below:

Autobytel’s Annual Report 2016

Industry prospects

According to a survey carried out by Accenture (ACN, Financial), 93% of the drivers surveyed are using digital media to research "new car buying," and 62% of them are initiating the buying process online. Accenture also notes that connected devices are driving higher research activity for auto shopping.

In another study, PWC mentions an increase in online utilization when customers want to buy a new car. PWC goes on to advise dealers to invest more in online technologies in order to remain relevant.

“The traditional combination of mass market advertising and showroom salesmanship is losing its punch as customers tap online, social media and mobile channels to gather the information they need to make better purchasing decisions.”

PWC further explains auto review sites and online car brokers are leveraging internet to enter the downstream value chain, influencing users’ purchasing decisions and taking a toll out of industry profits.

Source: Unlocking the value of digitization in automotive sales and distribution, PWC

The chart clearly depicts digitization is impacting the way people are buying cars. New car sales depend on digital platforms. A dated report from Edmonds revealed 100% of smartphone holders use their phones for car-buying research. EMarketer forecasts the digital ad-spending market to increase at a compound annual growth rate of 13.7% in the U.S. from 2014 to 2020.

Moreover, the U.S. automotive market is expected to remain stable around the 16.4 million-unit level by 2021, which indicates fewer opportunities to sell through traditional channels. As sales stagnate, automotive companies will furiously protect their market share through additional marketing spending, primarily through digital channels. This creates a decent business opportunity for third-party lead generators, which can assist automotive companies in maintaining their market share.

Due to increasing competition, sales wars and margin pressure, car manufacturers and dealers will shift away from the traditional marketing and sales channels toward an online sales channel going forward. Dealers and manufactures will focus on investing in websites for lead generation while cutting the face-to-face expense from distribution.

Thesis

A lead-based revenue model exposes the company to the growth of new automotive trends.

One of the key points is the company generates its revenue on lead basis, not on a sales basis. Increasing interest in electric vehicles (EVs) and technologically advanced cars increases consumer interest in car search, which results in lead generation. Even if a lead is not converted into sale, the company generates revenue based on lead generation. Therefore, increasing interest in EVs can directly increase Autobytel’s revenue. See the chart below:

Source: Alexa

The traffic on the company’s website rebounded at the start of the year and is trending upward. This indicates increased lead acquisition going forward.

The company is sticking to a good operating discipline

Sales and marketing expenses declined from $12 million to $11.6 million in 2016 on a year-over-year basis. General and administrative expenses also witnessed a decline during the same period. The company maintained its operating expenses around 33% for the past three years.

Autobytel is consistent in beating analyst consensus; growth expectations are healthy

The company reported a positive earnings surprise in the trailing four quarters. An average positive surprise of 17.5% was witnessed during the last four quarters. Being off the mark in terms of earnings consensus, analysts’ adjustments to price targets can precipitate in stock price gains. Moreover, analysts are expecting an earnings growth of 25% over the next five years.

Source: Yahoo Finance

The company is trading at a low valuation multiple

Autobytel is trading at a forward price-earnings of around 10 with PEG standing at just around 0.4. This indicates the growth is priced quite cheaply. Further, the price-book is also very low. The stock is basically trading at its book value. See the chart below:

Valuation – EVA

The economic value added approach also reveals upside for Autobytel. Assumptions include:

1. Earnings are expected to grow at CAGR of 10% during 2017 to 2022. One percent growth is assumed in perpetuity.

2. The capital asset pricing model is used to calculate the cost of equity. An increase in capital is assumed to increase the cost of equity going forward.

Focus Equity Estimates

Valuation reveals a price target of $18, which is conservative given the fact only 10% earnings growth is assumed for the next five years. Analysts are expecting an earnings growth of 25% over the next five years. As mentioned above, a P/E of 10 is dirt cheap given the S&P 500 is trading around 19. A low P/E is warranted because the company has witnessed top-line growth in the past. Gross margin declined, but the operating discipline offsets the effect of gross margin to some extent. All in all, a P/E of 10 is quite cheap even if the company lost a couple of percentage points in gross margin over the years.

Valuation – Monte Carlo

The Monte Carlo simulation shows the highly likely valuation for Autobytel is around $19, but the stock has the ability to touch $22. On the other hand, decline below $17 is unlikely. In effect, the chart depicts asymmetric risk-reward attached to the company. The company also supports a healthy margin of safety. See the table below:

Prudena, Focus Equity estimates

Final thoughts

The digitization of advertising along with increasing competition in the automotive space is expected to fuel the growth of third-party lead-gen platforms like Autobytel. The company supports a healthy top-line growth along with good operational execution. The company is facing gross margin pressure, but cheap valuation supported by a healthy margin of safety makes Autobytel a value buy. Given double-digit top-line growth in the past, healthy forward expectations and positive industry outlook, Autobytel’s position looks solid. As long as the company maintains its top line, a deeply discounted market price is not warranted. Based on earnings growth prospects, Autobytel stock has the potential to post a more than 50% return by the end of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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