ACV Auctions: Expectations For This AI Play Are Too High

Elevator Pitch

My rating for ACV Auctions Inc. (NASDAQ:ACVA) stock is a Hold. My view of the company's shares is mixed, which explains my Neutral rating for ACVA. On the positive side of things, AI has been a tailwind for ACV Auctions, as evidenced by an improvement in key metrics like the number of bids and the view-to-bid time. On the negative side of things, I think that ACVA's results for the remainder of 2023 might fall short of investor and analyst expectations.

ACV Auctions' Share Price Surge Driven By AI Theme And Above-Expectations Results

With my earlier March 14, 2023 initiation article for ACVA, I touched on ACV Auctions' financial outlook and key risk factors. As per Seeking Alpha price data, ACV Auctions' share price went up by +35.8% since my prior write-up was published. During the same time period, the S&P 500 registered a relatively smaller +11.7% gain.

The recent surge in ACVA's stock price is mainly attributable to two key factors.

One key factor is the emergence of the AI investment theme, which has pushed up the share prices of AI plays significantly. A June 10, 2023 Seeking Alpha News article cited a research report from Needham that named ACV Auctions as "the top pick selected in the transportation technology sector to see a meaningful AI lift."

ACV Auctions' recent key metrics suggest that AI has indeed boosted the company's performance. At its 2023 Analyst Day on June 1, ACVA disclosed that it achieved "an additional 80,000 bids by putting the right pieces of information in front of our dealers" in Q1 2023, and reduced its "view-to-bid time down by 20% by getting every dealer faster to the right car to purchase" for the trailing twelve-month period. ACV Auctions achieved a substantial improvement in its key metrics by utilizing AI to leverage the company's "data moat" as highlighted in the chart below.

ACV Auctions' Data Moat

The other key factor is ACV Auctions' most recent quarterly financial performance, which came in above Wall Street's expectations. ACVA released the company's Q1 2023 results on May 10 after trading hours that turned out to be a positive surprise, and its shares surged by +20.4% on the next trading day, May 11.

For the first quarter of this year, ACV Auctions delivered a +9.7% revenue beat, while its normalized net loss per share of -$0.03 was much narrower than the consensus forecast of -$0.09. ACVA noted at the company's Q1 2023 results call that its first quarter results surpassed expectations due to "continued market share gains."

In the next section, I discuss if ACV Auctions' positive share price momentum is sustainable.

I Expect ACVA's Good Share Price Run To Come To An End

ACV Auctions raised the company's full-year FY 2023 guidance after its actual Q1 2023 results turned out to be much better than expected.

ACVA revised the mid-point of its FY 2023 top line guidance upwards by +2% from $465.0 million previously to $473.0 million now, which translates into a growth rate of +12%. The sell-side analysts are even more bullish on ACV Auctions' revenue growth prospects, with the consensus financial projections (source: S&P Capital IQ) pointing to a +13% increase in the company's top line to $475.4 million.

Separately, ACV Auctions' updated EBITDA loss guidance for FY 2023 was -$29.5 million (ACVA's FY 2022 EBITDA was -$56.4 million). Prior to the company's Q1 2023 results announcement, ACVA had expected a much wider EBITDA loss of -$32.5 million in the current fiscal year. Wall Street sees ACV Auctions reporting a negative EBITDA of -$28.0 million as per S&P Capital IQ data, which is better than the company's guidance.

The bullish financial guidance and the analysts' optimistic financial forecasts are inconsistent with management commentary at ACVA's most recent first quarter results briefing. At its Q1 2023 earnings call, ACV Auctions acknowledged that there were mixed signals emerging from recent industry data. As an example, ACVA noted that second-hand vehicle sales are still down on a YoY basis, notwithstanding the growth in new vehicle sales.

Also, there seems to be a lack of alignment between ACV Auctions' short-term and long-term financial targets. At ACVA's 2023 Analyst Day on June 1, it was noted that the company's FY 2023 guidance and FY 2026 financial goals are assuming "incremental margins" of 60% and 40%-45%, respectively. This is another indicator (apart from management's comments at the Q1 earnings briefing) that implies ACV Auctions might find it challenging to meet its FY 2023 financial guidance. The implied "incremental margin" assumption for ACV Auctions' FY 2023 management guidance appears to be too high as compared to that for ACV's FY 2026 financial target.

Closing Thoughts

ACV Auctions' status as an AI play will limit the downside for the company's shares. But the market's expectations of ACVA are elevated as seen with its FY 2023 guidance and sell-side consensus estimates, which increases the probability of top line and operating earnings misses. As such, I expect ACV Auctions' shares to trade in a narrow range for the near term, which supports a Hold rating for the stock.

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