TIVP080 (Video): Auto1 Stock (AG1): Is this the Amazon for Cars? w/ Daniel Mahncke & Shawn O’Malley

13:54Daniel Mahncke:And with Auto One, that does sort of seem to be different, right? It can be highly advantageous for you in Germany when Auto One expands into the Nordics, because now you get a Volkswagen cheaper in Germany since it's sourced in Norway. And so where are they in terms of actually penetrating this giant market?

14:14Shawn O’Malley:So last year, they sold about 840 ,000 cars, and that's growing at about 22 % year over year. And that is supposedly a market share of about 3%, which is for the most dominant operator in Europe, not a lot of market share. At least it doesn't sound like that to me. And management actually openly talks about a path to 10 % market share. so this is still a dominant business but in the early innings of where they could go in the next

14:39Daniel Mahncke:couple of years if we decide that they can plausibly more than triple their market share in a growing market nonetheless then i can already guess this is a stock that's going to be in addition to our intrinsic value portfolio but i always get too excited too early on in these pitches so you know we should probably first talk about the company and how it got its start

14:59Shawn O’Malley:Well, I'm glad I already got you excited about it. Let's say it like that. So Auto One was founded in Berlin in 2012 by Christian Bertemann, who is still the CEO, and Hakan Koch, who's now the chairman. And when I looked at their backgrounds, I was not really surprised to see that neither of them actually comes from the car business or industry. I would personally say that Germany is probably not famous for its startup culture. But if there is a place where young founders go, it's certainly Berlin. And the AutoOne founders had worked in the consumer and its space before and then decided to basically apply the experience that they got from that industry and then apply it to a different industry.

15:37Shawn O’Malley:And at the beginning, I mentioned the graveyard of companies, the similar business model. What Christian and Hakan did differently was the order in which they built their platform. So most businesses focused on the consumer facing market, which makes sense because, you know, that's where usually the margins are significantly higher. But in order to build a two-sided marketplace, you need to deliver, surprise, surprise, value to both sides of the market. And that's why they started with a sourcing mechanism for the dealers. So the brand of Auto1's consumer sourcing is Via Kaufman Auto, which means we buy your car.

16:12Shawn O’Malley:At the moment I realized that that website is owned by Auto1, I knew I had to make an episode about this company because this won't be relatable to any US listener. But Wir kaufen den Auto is one of the biggest marketing campaigns in Germany. It's actually close to impossible to not know this brand. And I don't know if that tells you anything, but they advertised with Michael Schumacher's brother.

16:35Daniel Mahncke:Michael Schumacher, for everyone who doesn't know, is one of the most successful Formula One drivers of all time, right?

16:42Shawn O’Malley:That's right. And to be fair, Ralf Schumacher was also a Formula One driver. but of course it's kind of hard to look good when you know compared to your brother who is one of the most successful drivers of all time the funny thing is i was one of the few people who didn't know about the ad for the longest time because as you know i don't watch tv anymore for many years now and thanks to youtube premium which is one of the best subscriptions i have obviously not an ad for youtube i don't get ads on youtube either so those ads were completely dominant but i didn't know about them i only found out because of this meme culture that is basically now created through the ad and also the personal life schumacher and through those memes i found out about the ad so in my research now i found that ottawa has websites with the same name in the local language of course for pretty much every european market they're in and they use the same marketing strategy there too so high frequency ads on pretty much every possible medium

17:38Daniel Mahncke:so i think we need someone to do some research on what i call the meme moat because if your business becomes a meme, it can lead to disproportionate returns, right? I mean, that's for sure. From GameStop to Ryanair's brand team, which we talked about in the Copa Airlines episode recently, some companies have exploited internet culture and retail investing to a huge degree. And I mean, seriously, if your brand is consistently going viral online due to its sense of humor, that is some kind of advantage.

18:12Shawn O’Malley:I mean, the first company that I immediately think of is Duolingo. But that's also the company where you see that over time, if basically your entire marketing engine is built on viral memes on, let's say, Instagram or TikTok, that can also hurt your business. I think in this case, the good thing is that it doesn't really matter if people find the ad annoying, because if you want to sell your car quickly, you just go with the first website that comes to your mind. And by now, at least in Europe and especially Germany, that will almost certainly be the account from that auto or we buy your car.

18:44Shawn O’Malley:So step one was just how do we buy cars from consumers at scale? And this is basically done by this website. And then in 2013, step two came into the game, which is that they launched auto1.com, which is the dealer marketplace. It's a bit confusing because it has the same name as the company, but auto1.com is the dealer marketplace, the website. So that's basically where you have the wholesale auctions, which gave them the demand side and crucially also gave them the pricing and the transaction data. And then it wasn't until I think 2020, so eight years in that they launched Autohero, which is the consumer retail business.

19:23Shawn O’Malley:So a lot of different websites all under the Auto1 umbrella. And that's basically Autohero, the part that looks most like Kavanaugh, which is, you know, a lower margin part of the business focused on the car dealer side. And while that's a lower margin business, and many people say, well, why do you even expand into it? That's also where you build or create these competitive advantages. It's kind of similar to Amazon or Melly building a logistics network. It's quite expensive and unprofitable for the longest time, but it is an advantage for merchants who don't have the capacity for shipping, cars themselves, and also provide better customer service.

19:59Shawn O’Malley:Also, I mean, we live in 226, so every good marketplace is just as much a data business as a retail business. And we talk for hours about that when we cover the lending and ads businesses of e-commerce players, but also, you know, Uber. And Auto One is such a data business as well. And one of the most critical things is to pay the right price for a car at the We Buy Your Car brand. Otherwise, obviously your margin is gone.

20:24Daniel Mahncke:Oh, come on. Don't be afraid to use the German version of it. If you're Kauf and Dain Auto. I mean, I'm having flashbacks to my high school German class, But perhaps you can quickly explain what data exactly matters and how the process works for people who do decide to sell their car on Virkauf and Dyn Auto. Like, does it just happen over the Internet? Or is there first this process of meeting online and then an in-person meeting that happens subsequently?

20:51Shawn O’Malley:Sean is a bit shy, but he actually took German classes in high school and he's pretty good. So maybe one day we will drop an episode which is coming out in German. So yeah, getting to your point, you have to go to the website and there's basically a process that is starting and it only takes about three to four minutes. And I actually tried it myself. So it is very fast. And you basically upload pictures of your car and then you list the most important details. And since Auto One has realized transaction prices for pretty much every car out there with pretty much all imaginable conditions, it has a pretty good idea of how much your car is actually worth at that point.

21:25Shawn O’Malley:So they give you a price for how much they would buy the car. And they're pretty proud of the fact that by now, 90 % of the price finding works with their own AI models. Well, and then if you like the price, you just go to one of the 750 pickup stations where a dealer does a final 20-minute check, including a test drive, and then you get your money.

21:46Daniel Mahncke:Daniel, do I want to know whose car you uploaded pictures of to do this? No, no, no, you don't. Okay, well, we'll leave it there then. So at the pickup station, there is not the normal haggling process, right? Because that's exactly what AutoOne was supposed to prevent for you as a private seller. If you're a fundamental investor like me, you need a research terminal that actually keeps up with you. That's why me and my colleague Daniel Monka use Fiscal AI for every episode of the Intrinsic Value Podcast that we do. It's the complete stock research terminal built for people who care about the numbers.

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23:21Shawn O’Malley:Right. As long as the car is in the condition that you pointed out on the website, you should also get the price or at least very close to the price that was recommended by the website before. And as far as I know, that works in practice. So to be fair, the prices are certainly on the lower end of what you would get for your car if you, for example, sell it yourself through a different channel, consumer to consumer, for example. So there's still this trade-off between comfort and price, at least to some extent. But if you ask me, I mean, I would much rather get slightly less money for a whole lot more comfort and also speed in the selling process.

23:58Shawn O’Malley:And one more thing I want to mention on the data is that Auto One has the advantage of being on the buyer and the seller side of the car. Other classifieds have tons of data too, but it's only asking prices. So they don't actually see what the car sold for or, you know, what condition it actually was in since they only connect buyers and sellers. And Auto One actually sees all of these things. So that basically gives them a way better understanding of the actual prices, the actual conditions, and how much buyers paid and sellers got.

24:28Daniel Mahncke:I would imagine this also plays a role when we think about AI, right? I mean, we always talk about proprietary data sets, and that's one of the most important things in an AI world. And it does seem that AutoOne has that.

24:41Shawn O’Malley:That's actually something that the CEO pointed out in his latest shareholder letter. So when he was asked about the risks of AI and also potential AI startup clones, he basically said that they could try to scrape the entire internet, but wouldn't be able to access or find the data that AutoOne has because it basically doesn't exist anywhere else. And beyond that, you also have, you know, the huge logistics network to get cars from, for example, Norway to Italy, and the partnerships with tens of thousands of dealers and the eyeballs of 100 ,000 consumers. So this is certainly a capital intensive business with massive barriers to entry.

25:19Shawn O’Malley:And I did not fully get where AI should come in and disrupt this business.

25:23Daniel Mahncke:There's a pretty strong flywheel with this company too, I would think, right? More transactions make the pricing models more accurate. A more accurate pricing model lets them offer sellers a slightly better instant price and quote dealers more tightly. So more sellers and more buyers come back, which means more transactions, which makes the whole model better again. And around it goes. And so to me, this looks like Auto One might become one of those scale economy shared businesses that Nick Sleep loves to invest in and he's one of our favorite legendary investors. And every gain in scale lets auto one quote sellers a slightly better price and dealers a slightly tighter spread.

26:05Daniel Mahncke:And instead of pocketing that as margin, they pass it back to both sides to pull in more volume.

26:12Shawn O’Malley:And the other side of it is network effect. So to make a two-sided market work, you need both sides of the market actually to be there, obviously. And on a website, dealers won't come because there are no customers bidding to offer them a good price. And the customers won't come because there are no cars that are actually worth showing up for. And it's incredibly difficult to break into this business because every new entrant now has to compete with the scale of Auto One. And if you're a dealer, you won't switch to another player who can only offer, let's say, 10 % of the volume that Auto One can offer.

26:46Shawn O’Malley:So there's just no incentive for both dealers and also the buyers to switch. And just to point out the scale again, I mentioned that a minute ago, Auto One works with 60 ,000 dealers, of which about 35 ,000 actively bought a car, at least one car, in the most recent quarter. And they also sell to over 100 ,000 consumers. And at least that's my guess. They sold 100 ,000 cars to consumers last year. And since I assume there are few people out there who buy more than one car, I also guess that the number of unique consumers should at least be in the same region.

27:19Daniel Mahncke:I think that's a pretty fair assumption. You briefly mentioned, though, the founders and that they're both still involved in the business. So I assume they also both own a good chunk of stock. Is that true?

27:30Shawn O’Malley:They do. And they actually own quite a lot. So Christian Bertramann, the current CEO, owns about 12.5 % of the company. And Hakan Koch, who is now the chairman, owns about 9%. There's another detail that I actually quite like because usually we pay close attention to incentive systems and the CEO actually just got a new one. So his new deal is a five-year term running through 2030. And the key hurdle rate is the share price has to hit 75 euros, measured as a three-month average at least once by the end of 2030. So currently the stock is priced at about 20 euros and it wasn't materially higher when this deal was signed.

28:09Shawn O’Malley:So that makes me assume that the CEO does actually believe this is a realistic target to hit. And the interesting thing is that the new CFO got a bonus tied to the same structure. And that kind of matters to me because the CFO in the future will play a significantly more important role at AutoOne because the company is now growing its financing business as well.

28:31Daniel Mahncke:We'll talk about that. And I actually like that Auto One seems to be taking a much more cautious approach there in their lending business. And for example, Carvana, which is good because I don't want to own a car retail business where half of its gross profits are coming from subprime loans, which is, to my understanding, sort of the situation that Carvana is in.

28:51Shawn O’Malley:It's certainly not Auto One's approach, which is good. Generally, there's close to no subprime lending in Europe's car market. And to get back to the CEO payment one more time, on the size of the bonus payment, the CEO would get a payout of 400 to 900 million euros, basically depending on how much the stock will actually be worth at the time. So 900 million euros would only be possible if the stock is, I think, was about eight times higher than it currently is. There's also a second factor that has to be met, and that's adjusted EBITDA. And I don't want to get too much into the details here. And of course, we're not huge fans of EBITDA.

29:28Shawn O’Malley:But generally, I do like the idea that the CEO gets paid a good amount of money when the stock quadruples in the next four years. And beyond that, his salary is actually quite low. I think we talk about 500k. So his main way of making money is really the stock, both because of this package we just talked about, as well as his 12 % stake in the company.

29:48Daniel Mahncke:Yeah, if anybody here is at 500k is a low salary, I think we should emphasize this is in the context of talking about what other CEOs make. But yeah, earlier, you walked us through the process of selling a car on Virkalf and Dynauto, we buy your car. And so now what happens after Auto One has bought the car?

30:09Shawn O’Malley:they have a couple of potential routes so the first pathway is auto1.com and again it's a bit confusing but that's their wholesale marketplace so it basically has the same name as the overall company and so whenever i say auto1.com that's being the marketplace and that's one of the options where the car just gets sold to a dealer somewhere in europe and about 90 percent of cars actually take this way and the friend that i mentioned earlier who works in the industry is doing sales for a competitor of auto1.com. So the turnover channel, as he's telling me, is quite high. And if you sell a lot of cars, you can actually also make pretty good money in this business.

30:48Shawn O’Malley:So for auto1, it usually takes about a month to turn around the entire inventory. So while you take on a lot of capital, it's also not tied up that long. And then the second option is for the car to be sold on AutoHero, the retail channel. So if they think the car will earn more money if it's sold directly to a consumer, they send it to one of their big reconditioning centers, they fix it up, they photograph it, they list it and deliver it to a buyer's store with financing if they want to and also a return policy. So that channel takes about three to four times longer. So Otterwan has to hold on to the inventory much longer compared to the wholesale channel.

31:28Shawn O’Malley:And I think that three to four months seems quite long. And many of the dying companies we talked about at the beginning also suffered from elevated inventory levels before they went out of business.

31:40Daniel Mahncke:And does it sound like a good thing for their cash conversion cycle?

31:44Shawn O’Malley:It does not. But I did listen back to the earnings calls from the last two years, and they talked about inventory and their strategy in a couple of them, obviously, because it's an important topic. Back in late 2025, the framework was basically, we're deliberately building up selection. And it also made sense because at the time, they massively ramped up the investments for the AutoHero brand marketing. So pouring money into making AutoHero a household name across Europe and similar to the Via Kaufmann Auto brand. And you can't drive a bunch of new shoppers to your side and then leave them with nothing to buy.

32:21Shawn O’Malley:And generally, retail just has longer days outstanding than merchants. So that's kind of the nature of the game that you're playing. A retail car sits while it gets refurbished, photographed and delivered versus a wholesale car that's gone in about a month. So a chunk of that is structural and I wouldn't say that it's a problem that AutoOne specifically has. But on the latest earnings call, the CEO also talked about a new AutoHero trading system with a new stocking algorithm that's specifically designed to turn inventory faster and in a lot of cases actually also hold less of it. So to me, this does signal that they do want to improve the turnover in the retail side of the business as well.

33:01Daniel Mahncke:How about we walk through the economics a little more here? I have a pretty good understanding now of why the two-sided marketplace works and why it makes sense for both dealers and consumers to use the AutoOne ecosystem. You have a win-win dynamic for sure. But how much money does AutoOne actually make from all this? I assume the consumer business is probably more profitable, but you said 90 % of their volume actually goes through the dealer channel.

33:27Shawn O’Malley:So the first thing I should say is that revenue is basically meaningless in this business because if I sell a car for 25 ,000 euros, I book 25 ,000 of revenue, but I maybe keep a thousand or maybe 2 ,000 of gross profit. So the car is, you know, 85 to 90 % of the price. So the only number that matters is actually gross profit per car, which everyone calls GPU, gross profit per unit. So on the wholesale side, the merchant business, they did just under 750 ,000 cars last year with an average price of around 8 ,500 euros. And they made about 1 ,000 euros of gross profit GPU for that car. So that's about, you know, an 11 to 12 % gross margin.

34:13Shawn O’Malley:And on the retail side, Auto Hero has only about 100 ,000 cars sold, but the average price is doubled. So around 17 ,500. And the GPU is about 2 ,600 euros. So, you know, 15 % gross margin. So retail car earns 2.5, 2.6 times the gross profit of a wholesale car.

34:32Daniel Mahncke:So is the longer term goal to see a makeshift from wholesale to more consumer focused sales?

34:39Shawn O’Malley:I'm sure they would take more growth in the consumer channel, which, by the way, is growing at a fast clip and also outpacing the wholesale channel. But it's only one lever to pull. So the wholesale channel's margin is much lower, but the faster turnaround makes this business actually way more profitable than it appears at first glance. So I would say the dynamic here is a bit similar to the fallacy of thinking that a company is fantastic when it has 50 % return to an investor capital. Generally, obviously, everybody would agree with that. But if there are few reinvestment opportunities in the business, then even the best return on investor capital doesn't actually mean it's a fantastic business.

35:16Shawn O’Malley:And in this case, it's somewhat of the opposite where the business channel looks worse than it actually is because of the wholesale channel turns inventory every single month. Then they recycle the capital that they have invested about 12 times a year. So if you make a 5 % EBITDA margin on each car and you turn the money 12 times, the return on the capital that is actually tied up is something like 60 % before your account for overhead costs and all of the other stuff. So to me, 60 % on the tied up capital sounds like a pretty fantastic business. And the retail car obviously earns way more per unit, but it also sits for three to four months.

35:54Shawn O’Malley:And it leads into reconditioning, delivery, marketing. So there's just a lot of costs that is basically tied up with that capital for a much longer time. So I would say it's also important to look at operating expense coverage. So after accounting for the operating expenses, units sold to a merchant barely make money anymore. So the margin is very, very slim. So in a best case scenario, you have operating expenses come down over time. We see a shift toward retail volume. And then also we see faster inventory turnover. Kind of all of those three things combined. That's how you get to what management wants.

36:30Shawn O’Malley:10 % market share, significantly more operating leverage and significantly better company than we have seen in the past few years. and we already see the first two happening and AutoOne is actively working on further improving turnover to also get this third engine going.

36:46Daniel Mahncke:You hinted before at another part of the business that might become a bigger margin driver over time and that's financing. You already said it's not quite like the Carvana business but just to rehash it, Carvana makes about half of its gross profit from what you might call subprime auto loans so it's more of a low quality lending business than even just a regular car dealership. And from what you've told me about Auto One so far, that is not at all what they do.

37:16Shawn O’Malley:Yeah, so again, Auto One doesn't make meaningful money from subprime loans at all, because in Europe, subprime auto lending, basically, I'd say it doesn't exist the way it does in the US. I mean, the regulation is obviously much stricter. You also have capped interest rates and the whole market skews prime and near prime. So the credit risk profile is structurally different from cars or consumers in the US. And it's estimated that about 15 to 20 % of the entire US auto finance market is subprime, whereas in Europe, that number is closer to 2 or 3%.

37:50Daniel Mahncke:So do they lend to both sides of the market, the consumers and the dealers? I know that's something we've seen with some e-commerce players. And when we talked to Grab's CFO, Peter Owe, recently, he said that Grab focused on loaning to drivers first, since they had more data on them that was much better than what they had on consumers.

38:12Shawn O’Malley:Yeah, that's the difference between Grab and, for example, the big e-commerce players like Melly or C-Limited, because they obviously have great data on merchants as well, but they also have incredibly valuable data on their consumers, which obviously makes lending to consumers a bit less of a black box as it might have been for Grab, especially in the beginning. AutoOne is also lending to both sides of the market. So on the dealer side, they're lending to basically fund the inventory that dealers buy. And on the consumer side, they're financing the auto hero buyers. And the interesting evolution is that historically, auto one was basically just a lead engine.

38:50Shawn O’Malley:So they would hand the customer off to some other lender, and then just, you know, make this little margin on the referral, as we've seen with a lot of businesses when they started out the lending business. Now, though, they are vertically integrating into it. So that means they originate the loans themselves, then they securitize them. And what that means is that AutoOne now makes the loan itself. It's the lender and the customer owes AutoOne. And that's a way more profitable way to do it, but it also ties up way more capital because AutoOne actually has to go out and fund the loan and then wait years until the loan is actually repaid.

39:26And I guess

39:26Daniel Mahncke:securitizing is how they get that cash back, right? I mean, they bundle thousands of these car loans together and then sell the bonds that are backed by the loan repayments to outside investors. And AutoOne then gets money through the sale of those bonds and the buyers get the interest paid on them. And with the money that AutoOne is getting, they can go out and then fund new loans and then the cycle just continues.

39:51Shawn O’Malley:And the best way to check the quality of the loans is to see how demand actually looked and the interest rate that was charged. So AutoOne priced their second consumer ABS, and ABS just stands for asset-backed securities, at about 250 million euros. And it was heavily oversubscribed. And if it's oversubscribed, that just means that there are a lot more buyers competing to get their hands on the bonds, which also means that the seller, which in this case is Auto One, can push up the price and at the same time push down the interest rate. So I think the interest rate ended up at about 87 basis points over the Euribor, which is the benchmark rate and the rate banks lend to each other in Europe.

40:34Shawn O’Malley:And 87 basis points over means that Ottawa pays the benchmark, so the Euribor rate, plus 0.87%. And that spread is basically the risk premium that investors demand for lending against these loans. And you know, the rule of thumb is that the tighter the spread, the safer the market thinks the collateral is. Maybe I went into way too much detail here, but it kind of gave me flashbacks to my university class of pricing bonds and all of it. And I thought if I would suffer through it, all of our listeners have to too.

41:04Daniel Mahncke:No, I think it's a good learning point. And I feel much more comfortable knowing that there's no subprime lending going on here. But the downside is that the upside from the lending business is now going to be lower, right? And so if you take away Carvana's profits from selling loans, the rest of the business wouldn't necessarily be generating particularly much in profits.

41:24Shawn O’Malley:That's right. So no subprime means significantly less risk, but it also means they will most likely never get financing to reach 50 % of gross profit as Kavanaugh does. So I see financing here more as a third business unit and potentially in the future, a margin level for them. And it's also why the new CFO is coming in for, which we'll get to, but it won't take over the business, which to be totally honest, I kind of like. We looked at a lot of companies now that do a lot of financing, and we often talk about the sort of asymmetry there. If everything goes well, that's perfect. But if things go south, you lose a whole lot of money and basically your entire business.

42:03Shawn O’Malley:Of course, the one caveat that we should point out here is that compared to most other businesses that we looked at, which were all in emerging markets, this is a company in Germany. So, you know, the lending rates, the interest rates, and also the risk of the lending businesses is significantly lower than all the other businesses that we looked at in the past. And I would still want to buy Auto One for its core business and not for lending alone. So I'm generally not a huge fan of lending businesses. But if they strengthen the overall ecosystem and they come with limited risk, which again, I think in this case is the case, they are a great addition to the potential flywheel of the company.

42:40Daniel Mahncke:How about we talk competition? And you've got local car dealers, you've got the classifieds giants, and then you've got some other integrated players. And so walk me through the three different competitor sets here and where you see the biggest risk for auto one. And if you think any of them are actually a particularly concerning risk.

43:03Shawn O’Malley:So in theory, the advantages of local dealers are trust within the local community and also a physical presence. I'm not sure how much value I give the trust factor, because if you are a repeat customer, you might know your dealer close by and you actually trust him. But I believe that most people buy a car maybe once or twice in a decade. And I don't know, that's not really enough to build trust with a dealer, in my opinion. So I don't believe most people rank physical dealers higher on the trust scale compared to classifieds or companies like Auto One. I do believe the fact that you can actually see the car before you buy it matters though.

43:39Shawn O’Malley:So if you buy a car on Auto Hero, you don't necessarily see it in person before it's delivered. And that's not too bad because Auto Hero does have a pretty good return policy. So you can actually send the car back and there are no hidden fees. Still, though, I think I would like to see the car before I actually buy it and take it for a test ride. Not that I would find anything wrong with the car, but still, just so I can, you know, save myself the headache of actually sending back a car if it's not the right fit.

44:07Daniel Mahncke:So I'm imagining you just pouring over endless reviews. I mean, how did you figure out that things work so seamlessly?

44:15Shawn O’Malley:Yeah, I did go through some reviews and then I watched some videos at, of course, two and a half times speed where people actually got their car from AutoHero. And I also talked to some people who bought their car there. And they also have, you know, everybody can look that up, an NPS score of 70, which is pretty good. I mean, for context, the NPS scale doesn't go from 0 to 100. It actually starts at minus 100 and then it goes to 100. So 70 is really good. It's not like a 7 out of 10 or something like that. So you might even give, based on these numbers, the trust argument to Auto1 over local dealerships.

44:50Shawn O’Malley:And just overall, they obviously lack the advantages that is making Auto1 so attractive, right? They have no pan-European operations. They have no chance to have the same scale at any time and so on. And I would probably say that the bigger competitor, at least for the consumer facing business, are these classifieds like Mobility.com, which is the leading classified in Germany, and AutoScored 24. And they are not vertically integrated like AutoOne. And as we mentioned before, they only connect buyers and sellers. So they don't actually touch the cars. And thus, they also don't have the data that AutoOne has because they lack the opportunity for these arbitrage international price differences.

45:31Shawn O’Malley:the only competitors that would actually worry me would be other similarly vertically integrated marketplaces. But as I mentioned in my intro, which is kind of why I did it, they basically don't exist anymore. There's one name that once again is linked to our extra thesis. And there's a company called Aramis. And Aramis is part of Stellantis and their entire ecosystem. And in theory, it has both a B2C and also a B2B business. I have to say though, the B2B business is way smaller than Auto1's, so it's closer to the classifieds like Mobila.com and AutoScore 24. And Aramis is actually flatlining, while Auto1 is growing at growth rates beyond 30%.

46:13Daniel Mahncke:You know, I had this bad feeling already that you were going to talk about a declining business whenever you mentioned Stellantis.

46:20Shawn O’Malley:Well, Stellantis is not in the best shape right now. That's true. And just for context, for the listener, Exo also owns a good chunk of Stellantis, unfortunately. So technically, we have a stake in the company as well, although our extra stake is certainly used as a Ferrari proxy.

46:36Daniel Mahncke:Is there any advantage to being backed by a brand like Stellantis for such a marketplace? I mean, I could imagine it might help with having privileged access to maybe vehicle supply.

46:47Shawn O’Malley:It does. But on the other hand, that's also to some extent what limits it. Because if you are backed by Stellantis, they obviously have a say in which cars you can sell. And that means you're more or less a retail channel for that exact brand and you're not really an actual competitor for a two-sided international marketplace like Auto One, which can sell whatever brand they want. So for example, a Lexus, there's enough demand in Europe for those cars. But it's kind of an interesting point because the OEMs in the background, like Ceylantis, like Mercedes, like BMW, they are interesting and I consider them to be a risk.

47:22Shawn O’Malley:So when I first looked at this business model and the entire industry, I thought that the biggest risk might be that OEMs try to take some of that used car market share themselves. Because a lot of the high quality Auto One supply actually comes from the leasing arms of the OEMs. So those are the two to four year old, single owner, well-maintained vehicles coming off lease contracts. And historically, a lot of these flowed into the open wholesale market where then Auto One could buy them. And they are disproportionately important to merchant GPU because obviously well-maintained, predictable cars are the best fit for cross-border arbitrage.

48:04Shawn O’Malley:But there was a trend that started more recently that OEMs now want to keep those off-lease cars inside their own certified used car programs. And I think it makes sense because if you think about all the work and capital it takes to actually build and market that car, then you only benefit from it once. there's certainly the goal to benefit from that car multiple times and sell it when it's used because this is just a huge market. Again, it's a 700 billion euro market and it makes a lot more sense to at least try and keep as many of them in the ecosystem as possible.

48:38Daniel Mahncke:And how much of Auto1's car supply comes from these leasing fleets?

48:43Shawn O’Malley:Well, I wish I knew, but unsurprisingly, Auto1 doesn't disclose that. I kind of tried to get to some ballpark number. So the biggest sourcing channel by far is Via Kaufenden Auto, which brings in about 2 ,300 cars per working day. So call it more than half a million cars per year. And if you then look at the total number, which is 840 ,000 cars, that's about 60 to 65 % of the entire supply. So the non-C2B supply splits into dealer trade-ins, ex-rental cars, and then these off-lease cars that we were talking about. And again, those are like the special cars that the OEMs would actually like to have and have in their own certified programs because they have the highest quality.

49:25Shawn O’Malley:In the broader European used market, off-lease and ex-fleet cars together are roughly 20 to 30 % of all used car transactions. But since Auto1 is slightly more C2B skewed, I would say that they're probably below the market average. So I would guess that it's off-lease exposure is probably a bit below the market average as well. So I don't know, maybe 15 to 20 % of auto-ones volume is actually this off-lease supply that the OEMs want to get back.

49:55Daniel Mahncke:And besides the problem of just general volume loss, those are also the highest quality cars, as you mentioned. So losing them would also hurt the brand to some extent, because people who shop in the higher quality end of the market are going to be less likely to find cars on Auto One.

50:12Shawn O’Malley:On the one hand, that's true. But I also believe that people who actually want to buy these high quality cars might just go to the certified programs generally, right? They don't first shop at AutoHero or Mobila.com, but they just generally go to Mercedes, go to their certified dealers, and then look for exactly the cars that they want. So while I'm not an expert in this sector, I would assume that customers who want only the highest quality used Mercedes would also go to a used Mercedes certified dealership instead of looking at other ones or even some other classified. So while it's generally important to keep those cars on your website, I don't think it kills the business.

50:53Daniel Mahncke:Or are those the ones that actually have a dealer they trust because they buy more than just one or two cars per decade?

51:01Shawn O’Malley:That's the other option. So yeah, long story short, they either go to the trusted dealer or they might go to certified Mercedes, BMW dealers. I don't believe that it would actually destroy the sort of flywheel that Auto One has built.

51:15Daniel Mahncke:What about the classified sites expanding vertically? I know you said to me earlier that mobile.com is the biggest site in Germany. And I just Googled it and it seems that the site is valued at about 10 billion euros. And it's not publicly traded, so I don't know how realistic that assessment is. But that would be twice the size of AutoOne, despite being a marketplace without any of the infrastructure and pan-European advantages of AutoOne.

51:44Shawn O’Malley:That's true. I would just take it as a sign of the undervaluation of AutoOne there. But no, I mean, that's probably the other reasonable risk. And the fact that mobile.com is not publicly traded makes the risk somewhat more realistic, in my opinion, because if they ever wanted to take other ones place, they not only would need to invest a ton of money, they would also turn this currently beautiful, high margin, asset-led business into a capital intensive, low margin business. And I don't know if investors would actually like to see that. But again, if they are private, you at least don't have a 50 % drawdown of the stock when that happens.

52:22Shawn O’Malley:And the fact that they have a lot of consumer eyeballs does not mean that they can just onboard 60 ,000 dealers from one day to the next. It certainly helps, but in my opinion, would still be a major restructuring of the business that I'm not quite sure if the incentive is big enough for them to go for. But I mean, who knows? They can't just watch AutoHero get bigger and benefit from the AutoOne flywheel without doing anything.

52:46Daniel Mahncke:So looking at AutoOne's financials, there's a huge gap between the profits they show and the income statement and then their cash flows. So I want to ask you if you can walk us through the differences that matter here so we have a better picture of whether this is truly a profitable company or whether this is a company that is earning half a billion euros a year like they did in 2025.

53:07Shawn O’Malley:Well, if you introduce it like that, it doesn't sound that healthy anymore, I got to say. So I mentioned it already, but never look at revenue. That's the first thing to say about this company and the industry in general. That has pretty much no meaning at all for other one. What matters are gross profit and margins, units sold and GPUs, the gross profit per unit. And the main metric that management is giving us is adjusted EBITDA. And adjusted EBITDA makes sense to look at the trend of the general business. But it also strips out things like stock-based comp, which we certainly don't want to do and strip out in our valuation later.

53:41Shawn O’Malley:Although SBC generally is not that high. I think it's about 15 to 16 million euros. So we certainly see much higher SPC at some of the US tech companies that we looked at. Now though, why are cash flows actually so much lower than the operating profits or EBITDA last year? I think the main reason is the inventory buildup. Inventory actually went from 700 million euros to 1 billion euros. So that's cash that sooner or later will flow back into cash flows. And the second reason is their lending book. R2-1 is currently scaling the loan book, which means they pay out money that will only flow back into the business over time, many years into the future.

54:19Shawn O’Malley:Both of those things flow through working capital inside the operating cash flow position and ultimately make the operating cash flow minus 450 million. So it looks quite bad. Auto1 also reports a metric that adjusts for those and it has the very straightforward name of net cash from operating activities pre-captive finance and pre-inventory.

54:42Daniel Mahncke:Very straightforward indeed. It sounds like There's a lot of adjusting that needs to be done to make the numbers positive.

54:49Shawn O’Malley:Well, this is not yet a cash flow machine. That's true. But I think there has been quite impressive inflection in EBITDA and net income levels as well. And again, I mean, a lot of what we see on the cash flow statement right now is working capital. So I do think this will change in the next couple of quarters and years.

55:06Daniel Mahncke:It makes sense. And if this is a company that can keep inflecting the way it is now, I mean, it wouldn't be surprised if the stock is much higher in a couple of years. The big question is in the if. So how about we talk about valuation now? What did the numbers tell you about how to value this company today?

55:23Shawn O’Malley:This has certainly been a tough one to value. I just felt that the range of outcomes still seems incredibly wide. And it really just depends on the direction the company takes within the next year or two. So as we kind of figured out, the most important thing to figure out is unit growth, what GPUs will look like, and on the merchant side and retail side, and then what the EBITDA margin will look like. So on the merchant unit growth side, I expect average annual growth of just over 10%. And the actuals over the past few years have averaged about 15%. But I do want to be conservative and factor in that growth will get obviously more difficult over time, especially since the merchant side of the business is the more mature part of it.

56:04Shawn O’Malley:So then management wants to get from, as we discussed earlier, 3 % to 10 % market share, which would certainly take another half decade of mid-teens growth. And while I do see that as, let's say, possible, part of the truth is that this is a fragmented market that has been so for a while. So I can certainly paint a bold case in which this is a fantastic company with a flywheel just starting to spin and over time you will gain market share. But part of the truth is that over the last 20 or 30 years, there just has been no company that got more market share than what we currently see with only 3%.

56:39Shawn O’Malley:So a big part would probably be the retail side, which is much younger. So I expect it to grow faster naturally. And in the past years, it has grown at an average of 50 to 60%. So I believe that if I would assume 20 % plus growth over the next five years, that should be possible. And then the next big thing to figure out is, again, GPU growth in both parts of the business. In this case, historic figures make just little sense to use because there was this huge bubble in used car prices during the pandemic years.

57:10Daniel Mahncke:So that's one thing I wanted to ask you about earlier. How cyclical is auto-warned business and how big of a factor are used car prices generally? From everything you said today, I guess they're somewhat shielded because they turned the vast majority of their inventory in a matter of about 30 days. So there isn't major volatility in used car prices in a 30-day span, I wouldn't expect. But still, I'm curious how that works.

57:35Shawn O’Malley:That's pretty accurate. I mean, in theory, Auto One takes price volatility risk since they have the cars on their balance sheet. But historically, that hasn't caused major swings. And I think it shouldn't as long as inventory keeps turning quickly, as you said. And I also don't expect to see similarly extreme swings in used car prices again anytime soon compared to what we have seen in 2022 and 2023. which is also why I basically completely ignore the GPUs of last years and just assume low to mid single digit GPU growth more or less in line with inflation throughout both channels so retail and the wholesale channel and I would say that you know that's probably the most realistic assumption maybe conservative but that's what I would go with and then you're only left with an assumption to make for the EBITDA margin and this one certainly does some heavy lifting in the model and again we've seen a sharp inflection in the margin in recent years.

58:31Shawn O’Malley:So in 2023, it was a negative 6%, measured by gross profit, by the way. In 2024, it was a positive 11%. Then last year, it was 21%. And I model roughly a two percentage points increase per year, reaching 31 % by 2030 in my base case. So the idea here is they scale, a larger share of each gross profit euro drops to EBITDA, And then long story short, if we apply our usual numbers, which is an exit multiple for this business, I think it's reasonable to go with about 20, a margin of safety of 20%, then an 8 % discount rate. If we do all of that, the fair value comes out to about 33 euros per share, which would be an expected annual return of about 15%.

59:17Daniel Mahncke:That sounds pretty good. And how about the bull and bear cases?

59:21Shawn O’Malley:In my bull case, the stock would actually exceed the share price that the CEO and CFO would need to get their bonus payments, at least before I apply my somewhat conservative margin of safety. And I won't go into the details here because I think everyone who's interested in the models can download them in our free newsletter and play with the numbers themselves. And the link will be in the show notes, as always. just in short higher unit growth slightly higher gpu growth and all of that will obviously also result in a higher margin as well so not a huge surprise there and then in the bear case the same thing but in the other direction with the caveat that it shows that there's quite some downside potential when the margins shouldn't materially improve over time actually the first time i modeled this i was surprised by how low the price is supposed to be we are sub 10 euros at that point.

1:00:10Shawn O’Malley:But then if you look at the stock chart, this is a stock that actually traded way below 10 euros just two or three years ago. So I do believe it's realistic, although it's obviously a quite severe bear case in which you basically have no growth at all. And the margins are staying at this level, which just because of the working capital changes is quite unlikely. So generally, this is one of the what I call destination analysis companies, meaning they are young and so far away from showing their full margin potential that a modeling exercise feels quite arbitrary. So what matters more to me personally is whether I like the company on a qualitative level and whether I feel that the quantitative side gives me at least enough of a margin of safety.

1:00:52Shawn O’Malley:And I'm actually not quite sure about the latter in this case.

1:00:55Daniel Mahncke:We don't look at a ton of small caps. So when we do, I am very glad that they're the German ones that you pitch because we can use your local insights. And I think it all sounds pretty promising, honestly, for this to be a company with a below 5 billion euro valuation. It is easy for me to see how the valuation could explode. But again, when I look at the financials, this is a company that lost a lot of money for a long time. And while it has become profitable in the last three years, even within that period, there's still been big swings of profitability. So the business definitely seems very young, very green.

1:01:31Daniel Mahncke:And there's also a decent bit of debt on the balance sheet here, actually, too. I don't know. I would have to defer to your judgment here. I mean, no matter what, based on the market cap and I think the level of uncertainty, it would be a small position in our portfolio. But really, I would be borrowing your conviction here. So it's your call on this one.

1:01:51Shawn O’Malley:That's kind of funny that a 5 billion euro company for you is considered a small cap. I should also say that in about a week, there will be the first ever Capital Markets Day of Auto One. And we're supposed to get for the first time, the breakout segment economics. So we're talking wholesale, retail, and also the fintech part of the business. And that would certainly be interesting. And I would suggest that we wait until then. And I will type up an update for the following newsletter. And actually, when you will listen to this episode, the Capital Markets Day is already done, then I will have typed up an update and will publish it this Sunday in the newsletter.

1:02:29Shawn O’Malley:Wow, that was actually some back and forth between the present and the future. And I hope everyone could follow. And with that, except for if you have anything to say, any last words for today, I would say we call it a day. And I will end today's episode with a quote by Nick Sleep. And he said, the best returns often come from aligning with great managers, not from beating them. Given the incentive structure here, I do believe that alignment is certainly there, and I'm at least keen to follow the company in the next couple of quarters. With that said, have a good one and see you next time.

1:03:21Daniel Mahncke:data, grabbing quotes from the latest earnings calls, and making use of real-time institutional grade data all in one place. And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include two weeks of Fiscal Pro for free and 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P. Thanks for listening.

1:03:51Thank you.

1:04:24Thank you.