Chit Chat Stocks - CarParts.com (PRTS) | Deep Dive

Episode Date: May 27, 2021

CarParts.com is an online provider of auto parts and car accessories. The company offers replacement parts, mechanical parts, and even performance parts to its customers. Started in 1995, CarParts.com is headquartered in Torrance, California. Listen in as Ian, Brett, and Ryan dive into what the company does and how the company can grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:31) Industry | (5:37) Management & Ownership | (7:13) Valuation | (10:20) Earnings | (11:55) Balance Sheet | (12:55) Our Analysis | (15:04) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. This is the Thursday Deep Dive episode. We have Ian Gray with us. As always, we're going to be talking carparts.com. We're recording this about six days ahead of time,

so some of the numbers are a little bit off. Just fair warning, we're doing this early, and we're doing that because Ian is heading off to an internship going big time on us, handover to an investment bank in San Francisco. If I'm not wrong, Ian, are you ready for that? You're going to hit the big time now at the big investment bank? Yep. Looking forward to it. I enjoy kicking back with you guys on the podcast and researching stocks, but I'm going to go get a taste of a little something different this summer. Yeah. Now we're the same. We have the same intensity as an investment bank now. Yeah, for sure. For sure.

I think it's a little different, but Ryan, I'll have you introduce carparts.com. But first, we have to talk about seven investing. Who wants to go? Me or you? You got it. Okay. So use our promo code CCM at checkout to get $10 off our first month. We'll put the link in the show notes as well. If you just want to use that, that takes the $17 a month down to seven bucks a month. And if you want to do the annual subscription, which I believe is $170, takes that down to 160 bucks, gets access to all their picks. There's seven each month, as you can tell. which is already the yearly is already a discount yearly is yeah it's already so it's a double

discount you're welcome discount with that yeah if you go in for the year seven picks each month from a wide range of analysts and they keep you updated on their picks they're always communicating with you we just read we read that one update yeah that's relevant to us for reasons that i can't say yeah we don't want to spoil what their picks are or anything but they're exciting yeah i mean they're not just throwing out the picks telling you to buy it they're telling you why they're updating you on the progress of the company all that good stuff uh but yeah let's get started yeah let's get to the show ryan do you want to talk about carparts.com yeah so they're an e-commerce company that delivers a range of you guessed it uh car parts so uh and they

they go direct to consumer that's the thing they tout but they also have wholesale distribution partners um and they tout more than 800 000 different stock keeping units um so basically just different parts. And then the majority of their items are sourced in Southeast Asia. I think they have some, they do some sourcing in America, but I believe most of it comes from Southeast Asia and then it's shipped out to America. And then they have three different types of items that they're pretty much selling. So they have replacement parts, hard parts and performance parts. The replacement ones are basically the exterior of an automobile. So think like if there's damage or there's wear and tear,

you can order that part to have it replaced uh through there and then there's the hard parts that's more like engine components uh more mechanical and technical type stuff and then performance is more designed uh i imagine this is more for like car junkies you're trying to improve the performance of the car um but then they they fulfill orders in one of two ways they stock and ship which is where they take delivery of it into their distribution center and then there's dropship, which is where merchandise is shipped directly from the suppliers to the customers. Am I missing anything or do you kind of get the gist of it? Yeah. I mean, I got some new initiatives. We'll probably talk about future growth opportunities, but yeah,

I think that's it. Okay. Yeah. I mean, it's really not a super difficult model, but I'll get into the history. CarParts has actually been in business for more than 20 years. They recently changed their name, but used to be known as US Auto Parts Network. And the company It was founded in 1995 by Sol Khazani and Mehran Nia, initially incorporated in California. I think their headquarters are still there. And Mehran Nia was the CEO, I think, until 2019. And he's still on the board, but there has been a CEO change, which I think we'll mention later. But the company first built a website in 1999.

They went public initially, I believe, in 2007. But in 2019, they've kind of done this revamp of the whole business model. They brought in new management. The new CEO is Lev Peker, I think. P-E-K-E-R. We're spelling it. Yeah. But yeah, they're trying to reinvent themselves.

They've hired a bunch of employees. They're growing much faster than they used to, and they're starting to expand distribution capacity. So they're really trying to become more of a digital model. And that's really what they're branding themselves as as well. I think it will take longer to evolve to a digital only because they're still going to have the wholesale distribution partners and stuff like that. But that's sort of the narrative they're going for now. Yeah, big time turnaround story here.

If you look at the stock chart, huge turnaround. I think they had sales declines right before this new management team took over. but I bet we'll talk about that later as well. I'll hit industry quick. So total US aftermarket for auto parts is about $280 billion. So large. And I mean, I think that makes sense, but you might not think it's as large initially. So it is quite big. And kartsbar.com is playing a subset of that. Like for example, they're probably not doing tires or some of the other things within the aftermarket. So they're not going after that total $280 billion, but at their size, I mean, that's not really anything to worry about. You're not concerned at all about market

saturation. I'd say their biggest competitors include AutoZone, O'Reilly, and then local mechanic shops that sell parts. And then there's also Pet Boys, who is a bit smaller. And then, for example, I'll just give an example of how much, how many sales, or sorry, excuse me, how much sales, I can't say this, how much revenue AutoZone does each year. They did about 13.4 billion dollars in the last 12 months and then used car sales in the u.s they kind of give a trend where the industry is moving used car sales have actually trended up over time while new car sales have trended down so there's only 14 million sold in 2020 and that was a lot farther down than it was in 2010 that might have been a coveted hiccup but you know with used car sales

growing and new car sales declining that could provide an industry tailwind you know small one for someone like carparts.com and cars are lasting longer too sure yeah i think they they mentioned in all their conference calls it's ticked up to about 11.9 years is the average age of a car on the road that should be a benefit for companies like carparts.com as well um i'll kick it over to you and you want to talk management yep so as ryan mentioned lev park or sorry parker lev pecker is the current ceo he was hired in 2019 as we talked about to enact a turnaround of the company. Um, he actually worked for the company from 2008 to 2014 as well in a variety of roles, both in their finance office and, uh, in their sales department, I believe. Um, but as

part of that, basically an entirely new management team was brought with him in 2019 and they were still hiring some people into 2020. And, um, so it's, it's a completely new management team has some experience in the company, but so far they've been doing some pretty impressive things. So in 2019 when he took over the stock was about a dollar a share today it sits at almost 15 15 or it's at 1567 as we're recording today so um a pretty pretty impressive stock return in just two short years um that's coming on the tail of um basically flat revenue growth from before he was there and even some a little bit of revenue decline to uh 58 growth in 2020 uh 2020 and 71 revenue growth in the last 12 months so so far it seems like they're doing a pretty good job

they've caught some covid tailwinds here but it's the fairly early innings of a turnaround story hopefully um as far as lev goes i i like listening to his interviews he seems like a grounded guy um doesn't shoot too high with expectations um one one question he got was on cnbc was something along the lines of is carparts.com the next or the amazon of car parts was basically the question which is a little bit of a silly question but his response to that was who wouldn't want to be the amazon of anything but we're just focused on building a great business so you know i think he kind of i like it he i'm reading the conference called transcript he seemed like a straight shooter he's not going to like beat around the bush under these stupid metrics he's just going

to be like all right we're going to do this usually mentions like three things of their initiatives. It's like a one paragraph response, maybe a few sentences, keeps it simple. And I like that. Yeah, exactly. He seems, like you said, a straight shooter. He owns about 4% of the shares outstanding. He made about $2 million in 2020, which seemed a little bit high. A lot of that was stock-based compensation as they hit a lot of performance goals. But these executives are being paid fairly well, but not insanely high. There's about 18% short interest. So a fairly high short interest, especially on a stock that's done as well as it has in the last year, two years. And then also fairly high institutional ownership for a stock of this

size, about 75% institutional ownership at a fairly low market cap. Yeah, that short interest as a long-term or as a long-only investor, if you're just going to buy the stock, That doesn't necessarily mean anything different about the business, but it can lead to increased short-term volatility if there's any short squeezes or there's a lot of short action out there. But I'll hit valuation. Market cap from when I looked it up is about $779 million if you use the fully diluted share count. And that is a bit higher than the weighted average share count. So the listed market cap on a lot of these sites is a bit lower than what it actually is. ticker is prts enterprise value is going to be slightly less than market cap but not much of

a difference and they haven't uh consistently generated profits so you know i don't know how much you want to consider that excess cash that's like kind of just going to be burned by you know by more investments they're making uh price to sales is about 1.56 price to gross profit about 4.46 no pe or price to cash flow that would really be relevant they're right around break even right now i'm sure ryan will go into more of the margin numbers and then they have a few million in share options and rsu's outstanding that could dilute shareholders versus about 50 million share counts so it's not crazy uh on the future share dilution here you know you're looking at definitely going to be at least two percent possibly around four percent each year if you're

looking at all the share options they're granting assuming no issuances as well yeah they may issue stock. They did some last year, about $5 million worth. I think it was $4.9 million. And the stock price is higher now. I think that was at $12. Yeah. So there was the dilution there last year that led the share count to go up a lot. They converted some preferred stock as well. But yeah, definitely track that with this company. Brian, do you want to hit earnings? Yeah. They had a first quarter revenue of $145 million. That actually grew 65% year over year. Gross margin is pretty steady. It's usually around 34%. And then they had a net loss of $2.7 million. Their net loss during the same

time last year was a million. So pretty similar, I'd say. And they're investing a lot into the business, which we have talked about, including those distribution centers and expanding capacity there. And then they generated $13 million in operating cash flow from the quarter, which is actually down from a year ago. The trailing 12-month numbers, they had negative $30 million in free cash flow on about $500 million in revenue, and they're unprofitable on a gap basis. There was some inventory, if I'm not mistaken, right? They had a big rise in inventory. That was their new cash flow, right? Ian, do you remember that or no? They did have a rise in inventory in 2020.

okay okay yeah do you want to hit the balance sheet then yeah that's a perfect lead into the balance sheet so they've got about 46 million dollars in cash about uh 98 million dollars in inventory which was up um from uh like 52 53 million at the end of 2019 so pretty significant rise almost almost a 50 or about a 50 gain why i guess why is that happening uh they're just there's growing there's okay yeah yeah they're growing and they're they're increasing they're building these distribution centers which i know we're going to touch on more later um which they're trying to stock up with inventory um because they're really focused on on trying to get things out to people within a couple of days shipping times are a big thing for them and so they're

trying to bring that down those shipping times which requires more distribution centers and more inventory um related to that they've got about 32 million dollars in leases which we're counting his debt, but still a net cash position of about $14 million. And then related to the inventory, the inventory ratio, turnover ratio actually improved slightly in the last 12 months at 4.2 times, up from 3.8 times in 2019. So even though they ramped up their inventory, they're actually selling, they're selling through their inventory faster now than they were back in 2019. It's not a perfect comparison, because it's their different business models. But this compares to an inventory turnover ratio of 1.3 times at AutoZone. And so that's basically

saying AutoZone is only selling through all the inventory they have on their books once throughout the year, whereas carparts.com is selling through about four times per year, which makes sense because of all the stores that AutoZone has and has to keep stocked. But it's more of an asset light model to that. Not a ton of cash, but looks to be a solid balance sheet and shouldn't really present much of a problem for them going forward yeah looking at the balance sheet there's a potential they may want to raise money in the near future but it doesn't look like they're gonna have to um unless they really want to grind like build out a few more distribution centers really quickly or something like that um that's gonna do what

they do with the first half of the show here let's get to the ad break and i'll get back for the second half cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back in next up is going to be product experience um anything with you guys i know we're not none of us are car guys i don't think you're a car guy so uh no no experience

buying anything on this website i have not bought anything on this website but i will say um as i was kind of diving into it a couple of weeks ago um there seemed to be just a level of trust here that there weren't on some other websites that there's just um i saw too yeah that there that's a big issue is buying a car part that's actually not truly what you're looking for. And that might be faulty or might not be quality. And a lot of what I was reading was saying that people people trusted trusted these guys quite a bit. How did you find this company? I guess there's a quick sidebar because you're the one that you know, recommended it last week. Yeah, I saw it on Twitter a couple months ago and kind of glazed over it, I think and then someone else DM me

about it a couple weeks ago said he was looking at it um and uh yeah just that kind of that twitter thing lots of flipping over rocks and getting little dms from here there from different people but yeah that seems like that happens that's basically everyone's uh idea generation these days i'll kick it over to real quick i'll give a shout out to patrick for the uh for getting it on my radar yeah there you go it's fascinating company uh ryan anything uh i went on the website i i do like that you can sort of search by model uh and they have sort of the product database there of what you might need um that's convenient but this this isn't catered to people like me like even if i procured a part or whatever i bought one i wouldn't know what to do with it so yeah i

think it's meant more for car junkies or people that know uh understand the build yeah yeah definitely that database is something that can help. Um, yeah, I'll just reiterate what Ian said. Uh, there are some positive reviews on the consumer affairs website. Not all of them are perfect. I think they still have issues with shipping the right parts. Um, it could have been a store, but with old management and then they also had problems with shipping delays and stuff like that, which hopefully as they have this new management team in there, they can fix that. Um, it kind of shows, I think the moat of Amazon that we underrate, uh, with that logistics network in there. But yeah, there's just some reviews like, for example, this quote, I've never had

a concern with them, like some of their competitors. So it looks like their brand is slightly better, but it's not bulletproof. There were some complaints on there for sure. It wasn't perfect. All right, let's hit competitive advantages next. Ian, what are your thoughts on carparts.com? I like their asset light model. As I was touching on in the balance sheet, they hold less inventory than some competitors like AutoZone or O'Reilly's or things that are more um kind of that brick and mortar type store they this is kind of this has become more of a competitive advantage as shipping times have come way down and it's not crazy to think like a lot of times when you need a car part you need a car part and you want to go drive to the store and get

it and pick it up um but with this it with shipping times coming down to one day two days three days it allows for people to actually buy things online that they used to need more immediate than online would allow them. And so I think this is starting to tilt the balance more towards asset light instead of companies that are super close to the consumer physically, like an AutoZone or an O'Reilly.

It's still early to know exactly how it's going to play out, but I think that's a bit of a competitive advantage. Right, that makes sense. Isn't that a bit of a catch-22 though? Because I guess the way to speed up delivery from that point is to hold more inventory in your distribution centers. or inventory is going to come up yeah yeah because you're still procuring those parts

especially the drop shipping process let's say from southeast asia it's going to take time so they said yeah they said there can be upwards of a month of a lead time when getting parts so um i guess that turn inventory turnover ratio is kind of a metric to watch right wouldn't you say again for yeah definitely for tracking this one um all right ryan what do you have for yours I wasn't, I didn't have any particular big one that stood out. Uh, I guess brand trust is probably a big one. Uh, the, they have an in-house brand that seems to be well-liked, but that's a very, uh, I think that's a small part of their total SKUs. Yeah. I think 50,000 SKUs I believe is what it was that are considered in-house brands. Yeah. They own like the cool

view mirrors. Um, I think it's less than 10% of sales. Yeah. Yeah. And then I guess, uh, potentially scale would be an advantage. They say that with the current expansion and distribution centers, the ones going on right now, the company will be able to reach 100% of their customers within the US in two days or less. So that would be an advantage over, I guess, some other online websites. I mean, that's not an advantage over like an AutoZone, who's pretty close to the consumer in most places, but, um, I would say overall they have advantages versus online in the brand trust. And then they have advantages, uh, with asset light versus the brick and mortar. Yeah. It's developing for sure. It's not there yet. Um, it's going to

take a while before they have any like true, you know, moat built. Uh, it doesn't feel like there's one yet, but you know, I guess mine's kind of a developing one as well. Like that database, getting it right uh to have a million or so skus on there from all the different parts for all the different models you know you're mixing electric vehicles in there now too uh you want to get that right for whatever people are buying most people do not understand the intricacies of like knowing oh i got this it's recommended to me you have no idea if it's right or wrong until you try to put it on you're like oh wow this is totally wrong so most of the complaints they had besides like standard shipping stuff which is what every website has are just

wrong parts so i think the having the million skus is something that autozone cannot really scale up to and then it's something amazon or walmart are not going to be focused on as their number one priority it's going to be like priority if they ever go after priority 30 50 something like that so yeah you can only be someone that's niche that's really doing this well because there are a million different skus among all these different models it is very complicated and if can get a right that's a giant value proposition huge time saver uh for a consumer that needs this yeah i'd say anything that has where you don't know where you're getting it from so like ebay and stuff like that they've said they uh compete with well they sell on ebay and amazon but if

you're getting it from someone you don't really know or you don't trust that can be a difficult proposition especially if it's used because just dangerous you're gonna get the wrong part or something faulty yeah i wouldn't buy a car part i don't think even on amazon because there's a lot of i don't you know we've all had the trouble you know of getting a bad amazon uh supplier all right next up is going to be future growth opportunities uh ian what do you have i have continued growth in the diy market um there's there's kind of been an assumption that diy will slow down coming out of covid that a lot of people started doing working on their cars or doing stuff around their house or things like that because of covid because they had extra time because they're around

their house because they didn't want to interact with other people like a mechanic potentially but i think it's an interesting story going forward whether people will continue to do a lot of this diy stuff and using things like um even they've even mentioned it on some of their conference calls or interviews that, uh, YouTube and people helping, um, teach other people how to do work on their cars has actually been a big boon to their business. And so I don't think that's going to slow down. I think there's going to be more and more people, especially as these cars start to age, um, and people hold onto their cars for longer that look at it and go, you know, I can probably, I can change this little part of my car and people are going to get better and

better about sharing, um, experiences online and, and, um, videos and content to help people work on their own cars. So I, I think that's going to continue to be a big growth try reform going forward. Yeah. I think that that makes sense. This could be one where, um, there's the New York, uh, ignorance where like, you're like, Oh, how many people are working on their cars on a wall street and stuff with in New York city. And in reality, there's still, you know, millions of people doing that around around the country um all right ryan what do you have for for future growpops uh mine's the opposite of ian's which is more the do it for me so they've talked about this it's the mobile mechanics so i believe i'm getting it right uh this is when a mechanic sort

of comes with the part installs it for you um and they compared it to the netflix model of instead of shipping which that might have been a bit of a stretch in my opinion they say internally they compare it to next Netflix, where they go physical stuff going on. Yeah. Yeah. It's not all additional. But I think that drastically expands the customer pool because there are a lot myself, especially I would pay to have a mechanic come and do it. And that could replace maybe some of these auto body repair shops. It could probably steal a lot of market share from them.

Just partner with them. I think they partner with them too. So, you know, you know what I mean? Like if you have, if you know, you're going to get that mechanic come over to your house, all through carparts.com yeah that's that that to me uh i guess i don't have any hard numbers on it but that is a much bigger customer pool than the do-it-yourself yeah yeah i think you're right there's no need there's no you don't need to put any numbers on it it's drastically bigger like you said and um what was i gonna say that's probably the most exciting part of the business that i read to be like of anything yeah and it's in oh it's in uh it's still in beta testing

as they called it. So we haven't really rolled it out. I think on to the, you know, all their customers, but we'll see. Yeah. It's promising, uh, for something that I could grow into over the next few years. Um, all in mind, it's more distribution centers. So they hinted about this on the call. They said they want to get one in the Northeast. I believe, I'm not sure where all their locations are right now, but they got that new one in Texas. So I think they have three. They have four, four, they're in four States. Okay. So it's, I believe. Okay. So they have at least four. If they got six or eight around that number around the country, there's a better chance of them getting that operating leverage that an e-commerce business can get that needs to get to

a big enough scale to have just geographically in the United States, if that makes sense. And that could really help build out the value proposition, build out the competitive advantage. You really see the economics of scale of an e-commerce business when you get the distribution centers around the country and you get two day or one day shipping or whatever it is, like we've already talked about. All right, let's move on to highlights and lowlights. Ian, what do you like about car parts? What don't you like? For me, it starts with the revenue growth. It's been impressive over this last year since they started this turnaround, and they believe they can hit 20 to 25% long-term revenue CAGR. I don't know exactly what that

means, whether that's five years or 10 years, but they think there's a lot of revenue growth in the near future. And the model makes sense to me. I like the progress. I like the management team. They also mentioned that about 30% of their revenue comes from repeat purchases. So presumably they're keeping their customers happy, which is always a good thing to see. As far as low lights, I'm not sure exactly what the long-term looks like for this business and for the auto market more generally as a whole. I think there's going to be a lot of change in the auto market going forward. And whether that's electric vehicles, autonomous vehicles, more public transportation options whatever it is there's just a lot of change coming up and

they're trying to position themselves well for the electric vehicle transformation they they say that i think it's like 90 of the parts are the same whether it's electric vehicles or traditional vehicles um and it just expands their market a little bit to sell that that different 10 of parts but there just seems like there's enough uh turmoil and transition going on in this market that it's going to be a little unclear what this market's going to look like five to ten years from now yeah evs do bring simplicity to the table too so there it's it's a way simpler um just engine yeah like power yeah i mean yeah the engine especially is a lot simpler so that can mean less need for uh you know replacement parts but we'll see and autonomous uh you know that that

is a threat for sure um and that's a looming one but you could it's a weird one that i think has made AutoZone but don't don't they just end up selling to the dealers at that point yeah so the number is that like you know your people worry about the amount of cars on the road declining substantially by like 90 percent but that's been a concern for the last decade when autonomous has been you know right around the corner right around the corner everyone's saying that so that is a limiting threat but it's too i think it's probably early to tell too early to tell if that's going to be you know within the next three years or within a decade or something like that yeah uh ryan what do you think uh i guess the macro benefit of cars lasting longer

makes people want to upgrade more and then some of the stuff we just talked about which is there is some competitive advantage against the other online players uh in the brand and then there's the asset light scaling which ian talked about versus more the brick and mortar stuff my low lights, though, I'm actually not a huge fan of the economics. There's a reason that they have 34% gross margins. And I think a lot of that cost of goods sold is there to stay. I'm not sure there's that much operating leverage other than lower freight costs with extra distribution centers. But even then, this isn't a business that sits at like 70% gross margins at any point. And then I guess from there you say, what could the net margins be?

And the case in my mind is, let's say, 5% or 10%. They're guiding for 10%, so yeah, that makes sense. I guess that's just not something I'm overly optimistic about. And then I think I might have had the dilution part wrong, but they've… Well, the past has been tough. They had the equity. The thing that concerns me is it feels a bit malevolent to change the name to a dot com and then equity raise after your stock shot up. And then the old founder sold like 50% of his shares.

That kind of threw me off. And I think that's where a lot of the short interest comes from. I think that's where, because I read a short report on Seeking Alpha that really talked about that a lot. when they asked on the conference call like you know shares outstanding jumped a lot randomly he said you know 18 out of the 20 members on the executive team are new and last year when we all joined we didn't have the cash to pay them which i guess is true um and i don't know i think the seller thing was probably what got me if this is really a business that's going to be around for a long time and growing 20 to 25 percent kegger yeah it's frustrating half your shares yeah it's

frustrating to see that but the founders are gone right he's on the board he's on the board now yeah well maybe maybe he's gonna i don't know maybe he's gonna be gone i mean but he basically got squeezed out you know you yeah if he got squeezed out then maybe it's justification for him selling but he's been on the board for three years. I don't think he was selling until now. Well, I mean, stock went up, what, 1,000% or 800%? So I don't blame him, but it is frustrating. Yeah, it's tough to watch out for, for sure.

Yeah, I guess if new execs start selling, it's worth paying attention to. Yeah, and do watch the option grants. They're fairly heavy. So that's going to happen. Yeah. I guess another potential low light, there is not an insane amount of liquidity.

I think this year might have been an anomaly, but minus $30 million in free cash flow for the year. Right now, they have, what, $30 million in cash waiting on the balance sheet? Is that – they might have to raise again. Yeah, I don't remember the exact numbers, but – Yeah, it's a little more like $45 million, but still, if they were going to continue to have some years like that, they'd definitely have to raise equity. yeah and then yeah one thing that could counteract that is i believe the texas distribution center was only at 60 capacity so if they just grow revenue by about 10 20 from here on a quarterly basis um that would probably counteract that and make the cash flow dynamics a little bit better

but they do have to keep growing if they keep building out these distribution centers you got to keep growing uh so yeah that is a concern what do you have yeah i'll hit mine i mean unit economics are sound. As Ryan mentioned, we're not going to be seeing high cashflow margins here for sure, but I think they make sense. This isn't something like Uber, I guess, or Lyft where you're like, man, how are they ever going to make any money? They have a better value proposition, I think, versus the offline competitors if they can get the distribution and sourcing correct and the delivery times correct um and i think the mechanic connector thing i don't know what to call it yeah i think you guys understand what i'm saying they're the mechanic mobile mechanic

mobile i don't know what their name is going to be is that the name or they call them mobile mechanics i do question i do question what the margins are like on that though and how like what the economics look like for car parts if it's like partnering with another auto body or something I don't know. I mean, you'd pay up to get your car fixed, so I don't think it can be that bad, but it's not going to be super high. I just think that value proposition is really strong. That increases the market to people like us that aren't car experts. low lights though at first glance i worry about the long-term viability of the auto repair market because evs have simpler engineering um and then there's also a threat that someone like autozone or o'reilly can replicate this model it would take a few years for sure um to do it you know what i mean like what would make it tough for them well you have to get a

million, the database going, you have to do that. You have to work out. I mean, kind of think about how Target and Walmart, it took them three, five years to turn that around. It just takes a while to build out something like this, but they can do it for sure. Yeah. I would rather be in that position, I think, as a shareholder where it's building out the database than it building out the footprint yeah this i think it's harder than it looks though yeah it's definitely tough um and then i also don't like how 35 percent of their sales are not coming from carports.com i think that number um it's kind of hidden in the 10k but seeing that number track down over time is going to be important because i think it has been yeah okay that's good then uh you know if they're just

selling on amazon ebay i mean what kind of business is this i don't know but overall things seem solid there i think there's a lot to like fuel lights as well um all right to wrap things up more or less interested in i think i know because you this was your pick but i want to hear your thoughts yeah i'd say it's probably only i'm slightly more interested um i think the model is interesting i think what you guys pointed out about uh the mobile mechanics and we really have talked about that quite a bit in the last few minutes i think that's potentially a big part of this business for them and maybe the main part of this business going forward um but the big question for me is would i rather just on that piggyback on the discussion you were just having

is what i rather own this company trying to build out the distribution centers and the footprint or would i rather own something like autozone that has a has a track record of generating cash flow of um buying back shares and who i believe could innovate and really start taking a big chunk of market like a target or walmart has done so because because carparts.com as much as we were joking about it earlier they are not the amazon they are not the dominant player in selling um car parts around the world and so for it it seems like me for a company like autozone that has over a billion dollars in cash on the balance sheet um that there'd be some possibility for them to really come into this market in a big way and um that's that's going to be the big question for me

over the next couple of weeks as i look into this more um do i want to own auto zone or do i want to own car parts because i like the market yeah and i think auto zone is a perfect acquisition or sorry car parts is a perfect acquisition target for autos quite yeah that'd take quite the leverage the uh yeah the well i don't know how much they just stop the the buybacks for a year and then buy and then buy them out you know no i meant car parts buying autos on oh oh oh yes yes yes that would uh that would be quite the ldo yeah i don't think that will be happening anytime soon but that combination could be promising but yeah that is something to watch out for ryan what are your thoughts i'm gonna go less interested uh i guess it's not a cars and

auto in general is an area that i'm particularly particularly excited about nor do i think i have any sort of edge in it um and then the valuation if they are successful looks okay but uh it it's not dirt cheap yeah yeah and i'll just point out too i meant to say this earlier but it's gone up 15 times in the last year about um this stock is not going to go up 15 times in the next year i'm pretty confident saying that uh i think that's a good bet yeah i think investors sometimes especially on twitter we start seeing a stock like this that goes up so much and you you start thinking oh it's going to continue just shooting up shooting up shooting up but this was a stock that was priced almost like it was going bankrupt uh prior to this to this growth and now it's being

priced like a company that has some moderate growth potential so um expecting a 15x on this in the next year is is you shouldn't be investing this because you're looking forward to do in the next year what it did in the past year yeah and just looking at that if you want to kind of because don't really have the profits right now if you're looking at the price to gross profit around 4.5 and you think that they're going to have any sort of profit margins around 10 percent um i don't know that i mean you're probably looking at right now in between something around 20 20 20 30 you know times earnings which is theoretical yeah it's theoretical they still got to execute there's dilution coming in um so yeah yeah what about you are you interested uh i'm slightly more interested

i like the business model i worry about counter positioning from someone like you know other players in the space um valuation isn't great versus like if you look at the valuation if this was a good business if this was a really good business you'd be like oh valuation is not bad you know if it's someone you're super confident in right but you're betting on someone where there's a lot of uncertainty um i don't know this could the i don't know the market's large to go after uh the auto part after market has been historically a fairly solid business compared to the actual automotive industry yeah i don't know i'm slightly more interested definitely going on the watch list but there are some concerns with this business for sure okay what's

your stock for next week okay we're going to be sticking with the car it's not even the car industry we're going to be doing formula one very exciting nice monty not money monaco is this This weekend is a big race. Monte Carlo. Monaco is the big race this weekend. While we're recording, it'll be a little farther down the road when we actually release the Formula 1 one. But, yeah, exciting.

I'm going to give you guys some easy homework, all right? You have to watch, at least start, the Netflix documentary. What, Race? Drive to Survive. Yeah, it's good. I don't know. But at least start it. I'm not going to make you watch a whole series.

But that kind of easy homework for you. But that's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.