As we all know from Star Trek, there are many parallel universes out there. While their existence cannot be proven logically—at least up to Vulcan standards—the idea of moving between universes remains legitimate food for thought, despite certain logistical issues. It was expected, however, that by 2250 or on Elon Musk’s 60th birthday, we might be able to crossover by using a Tholian artificial interphasic rift and a multidimensional transporter device.
Exciting news of an update has reached us here in Los Angeles—however in this case via the investing world. It appears that we have identified a crossing via sell-side research.
In our world, we bought KAR Global, (KAR), which is in the midst of a messy changeover. Specifically, KAR is part of a duopoly that has a majority share in the physical auction of used cars in the U.S. and is pivoting to be a digital leader due to the likelihood of the long-term diminution of physical sites. We paid what our research suggests is less than ten times cash flow.
Across the rift, we have newcomer ACV Auctions (ACVA), which as you might have guessed, is in the early stages of “disrupting” the industry. Now, KAR has displayed plenty of problems in operational competence, digital literacy, and capital allocation, so we do not in any way dismiss the competitive issues, but read this carefully:
Initiate Buy with $45 PT: We believe valuation does not adequately capture ACV’s growth profile. ACV trades at 14x ’22 EV/Revenue, which is a 40% discount to the 24x peer-based growth adjusted multiple. Our DCF-derived $45 PT implies 17x, which is a more modest but still compelling 30% discount to the growth adjusted multiple.
We may be very wrong in this particular example, but we still cling to the historical statistical sample that buying at under ten times cash flow will beat buying at north of ten times revenue.
