One of the more interesting stocks to watch this year has been Shift Technologies (SFT). This e-commerce player in the used car market has been on a rather interesting rise. Indeed, the used car market has come into focus for many investors as a key driver of the incredible inflation numbers we’ve seen of late. One might suggest that Shift should be a beneficiary of this environment.
However, SFT stock has lost approximately 70% of its value over the past year. Investors looking for exposure to the e-commerce space or the auto sector appear to have looked for direct exposure via other stocks. This company’s interesting offering seemingly hasn’t done much to inspire investor interest, mainly due to its valuation and loss-generating business.
That said, where there are strong secular catalysts, there’s something to look at. While I remain slightly bearish on this stock, let’s take a look at the pros and cons of why investors may want to give Shift a hard look right now.
Intriguing Business Model
Certainly, the first thing that caught my eye with Shift is its unique, niche positioning in the market. Of course, the company’s e-commerce platform is in and of itself something to look at. Buying a car completely online and having it shipped to your house — sounds good to me. Doing it on mobile, that’s next level.
Of course, this model is one that’s been difficult to gain traction. Heavy advertising spending and the up-front growth capital required to grow this business haven’t spurred the growth many investors have expected. Investors may want to remember that Shift went public in late-2020 during the SPAC boom and thus has the cachet of being a de-SPAC stock.
That hasn’t helped much. The overall SPAC sector has been decimated, and Shift is just one of a number of casualties in this space of late.
However, I think Shift’s other integrated products are interesting. This company has its own financing arm. Other value-added services such as vehicle contract agreements and protection plans can be offered. Thus, Shift is more than a used car company. It’s a technological platform with the potential for many revenue streams.
So, What’s the Problem with Shift?
Shift’s platform is one that, as many investors would expect, is capital-intensive to build and grow. One of the reasons Shift went public via a special purpose acquisition company was to raise money in a quicker and easier fashion.
The thing is, since that offering, Shift has been tapping equity markets for more growth financing repeatedly. This has diluted shareholders, and with a relatively long-term trajectory to profitability, this is a stock that has fallen by the wayside for many investors.
Fair enough.
Rising interest rates hurt companies that may take longer to become profitable. That’s because discounting future earnings located in future years with a higher interest rate is detrimental to a discounted present value analysis. For Shift, this has been a rough time to be a publicly-traded company (perhaps they should have waited to go public via a traditional IPO?).
Other Headwinds Remain
There are some who believe Shift can grow its revenues at a triple-digit rate over the medium term. Growth among sales in the used car space has been red-hot of late. However, demand has slowed somewhat due to higher costs than in the new car market.
These market conditions can work in both directions. Right now, it appears the higher prices consumers are paying for used cars are being offset by lower volumes. For Shift, these are headwinds that may be difficult to battle.
Additionally, Shift isn’t the only player in the e-commerce auto sector, far from it. Competitors such as Vroom (VRM) and Carvana (CVNA) have picked up steam, and it’s a race to gain market share.
That’s meant that Shift’s gross margins have been relatively weak, generally in the low-single digits, this past year. Whether those margins can pick up over time in the face of this competition is unknown.
There’s certainly a reason many investors are hopeful that top-line growth will blow away expectations in the near term. However, these headwinds are strong, and the market appears to be factoring these in.
Wall Street’s Take
Turning to Wall Street, SFT stock is a Moderate Buy. Out of three analyst ratings, there are two Buys and one Hold recommendation.
The average Shift Technologies price target of $10.50 implies 425% upside potential. Analyst price targets range from a high of $12 per share to a low of $9 per share.
Bottom Line
There are reasons why the market may be pessimistic about this stock’s near-term potential. However, analysts are quick to point out that this stock is a Moderate Buy. There’s something to like under the hood.
That said, until this company’s gross margins improve, this will be a stock many will simply want to put on the watch list and monitor from here.
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