TIP827: Auto1 Stock (AG1): Is This the Amazon for Cars? w/ Daniel Mahncke & Shawn O’Malley

Auto1 Group is a Berlin-founded online used car marketplace that survived the 2022 to 2023 industry downturn that destroyed nearly all of its peers, including Cazoo, which raised over 2 billion euros before going bust, and Shift, which merged with Carloops before both went bankrupt. Carvana nearly failed as well, restructuring 5 billion dollars of debt before recovering to become the best-performing stock of 2023 after being the worst-performing stock the year before. Auto1 is now growing at roughly 22 percent year-over-year, having sold approximately 840,000 cars last year, and is reaching its first profitable years.

The European used car market processes about 40 million transactions per year worth approximately 700 billion euros annually, with the average car on European roads being about 13 years old. The market is far more fragmented than the US equivalent, with the top 20 players holding only about 6 percent market share in Europe versus roughly 20 percent in the US, a gap attributed to dozens of different languages, regulations, and consumer preferences across the continent. Auto1 currently holds approximately 3 percent market share, the largest of any single operator, and management has openly discussed a path to 10 percent.

Auto1's consumer-to-business model buys cars directly from private sellers through its Wirkaufendeinauto brand, one of the most heavily advertised campaigns in Germany, with a process taking roughly three to four minutes online before a 20-minute check at one of approximately 750 physical pickup stations. About 90 percent of cars bought are sold through the wholesale marketplace to roughly 35,000 active dealers across Europe, with wholesale turning inventory in roughly one month. The retail channel, AutoHero, launched in 2020 and takes three to four months per car due to reconditioning, but earns approximately 2.5 times the gross profit per unit compared to wholesale, at around 2,600 euros versus 1,000 euros. Approximately 60 percent of cars Auto1 sells are transported to a different country from where they were sourced, exploiting price differences driven by varying EV adoption rates, since a combustion engine car commands a higher price in Germany, where EVs represent about 7 percent of cars on the road, than in Norway, where two out of three newly sold cars are electric.

Daniel Mahncke argues that revenue is essentially meaningless for evaluating Auto1 because the cost of a car is 85 to 90 percent of the sale price, making gross profit per unit the only number that matters. The company's EBITDA margin as a percent of gross profit was negative 6 percent in 2023, positive 11 percent in 2024, and 21 percent in the most recent year. Management's path to 10 percent market share rests on lower operating expenses, a mix shift toward higher-margin retail volume, and faster inventory turnover. Operating cash flow was negative 450 million euros, driven by inventory growing from 700 million euros to 1 billion euros and by scaling the loan book, though management frames elevated inventory as a deliberate buildup to support AutoHero brand marketing.

Auto1 is vertically integrating into lending by originating loans directly and securitizing them through asset-backed securities. Its second consumer ABS priced at approximately 250 million euros, was heavily oversubscribed, and cleared at approximately 87 basis points over Euribor, which Mahncke views as confirmation that no subprime lending is occurring. Unlike Carvana, which derives roughly half of its gross profits from subprime loans, Auto1 is taking a cautious approach, meaning it will most likely never reach Carvana's financing gross profit levels. Subprime lending represents roughly 2 to 3 percent of the European auto finance market versus 15 to 20 percent in the US due to stricter regulation and capped interest rates.

A key risk is that OEMs are increasingly keeping off-lease cars inside their own certified used car programs rather than letting them flow into the open wholesale market. Mahncke estimates Auto1's exposure at roughly 15 to 20 percent of total volume. No company in the used car market has exceeded the roughly 3 percent market share Auto1 currently holds over the past 20 to 30 years, and reaching 10 percent would require roughly another half decade of mid-teens growth.

CEO Christian Bertermann owns approximately 12.5 percent of Auto1 and his new five-year compensation deal running through 2030 requires the share price to hit 75 euros as a three-month average at least once, against a price of approximately 20 euros when the deal was signed, with a maximum bonus payout of 900 million euros requiring the stock to be approximately eight times its level at signing. Mahncke's base case fair value is approximately 33 euros per share using a 20x exit multiple, 20 percent margin of safety, and 8 percent discount rate, implying roughly 15 percent expected annual returns. The bear case shows the stock could fall below 10 euros, a level it actually traded at just two to three years ago. Shawn O'Malley notes Auto1 lost money for a long time, has shown significant swings even within its three years of profitability, carries a decent amount of debt, and says that if investing he would take only a small portfolio position given the market cap and level of uncertainty.