Cazoo’s Stock Forecast: Is It a Good Long-Term Investment?

British online used car dealer Cazoo is scheduled to go public through a reverse merger with the Ajax I (AJAX) SPAC at a valuation of $7 billion. The merger was approved by AJAX shareholders on Aug. 18. What's Cazoo’s stock forecast after the AJAX merger?

Cazoo will receive nearly $1.6 billion in gross cash proceeds, including $805 million in cash held by AJAX in trust and an additional $800 million in PIPE (private investment in public equity). BlackRock, Morgan Stanley, and Fidelity Management participated as PIPE investors.

Cazoo is expected to complete its business combination with AJAX on Aug. 26. Cazoo’s Class A common stock and warrants will start trading on the NYSE under the ticker symbols “CZOO” and “CZOO WS”, respectively, from Aug. 27 onwards.

Founded in 2018, Cazoo brings the secondhand car buying process online, enabling customers to buy and finance a car, or rent a car for a certain period of time. The company is headquartered in the U.K., but has operations in Germany and France as well, and is planning to expand to Italy, Spain, and other parts of Europe.

AJAX stock isn't tracked by any Wall Street analysts yet. However, the stock seems to have a bright outlook. Cazoo estimates that the used car market in the U.K. and the rest of Europe is worth $700 billion. In addition, the company thinks the market is ripe for disruption, given that just 2 percent of sales happen digitally and 31 percent of customers don’t trust car dealers.

At AJAX’s current market price, Cazoo’s pro forma enterprise value is close to $5.8 billion. The company estimates it will generate total revenue of $1 billion in 2021 and $8 billion in 2024, giving the company enterprise value-to-sales multiples of 5.8x and 0.7x for 2021 and 2024, respectively.

Carvana, which operates a similar business model to Cazoo, has seen its stock price nearly double over the last year. Carvana is trading at a next-12-month enterprise value-to-sales multiple of 2.4x.

The COVID-19 pandemic has boosted online used car sales. Cazoo uses data and algorithms to decide which cars and models it needs to purchase and sell, and at what price. The company also offers a subscription model, which allows consumers to pay a monthly fee for the use of a car. With more than 6,000 subscribers, Cazoo is a market leader in Europe for rental car subscriptions.

In the second quarter, Cazoo’s revenue increased by over 600 percent YoY (year-over-year) to 141 million pounds, with the number of cars sold through its platform rising 429 percent YoY to 10,692. Cazoo expects to sell 57,986 cars in 2021, 172,557 in 2022, and 445,414 in 2024.

In 2021, Cazoo aims to generate sales of more than $1 billion, with the objective of reaching profitability in 2023. The company also expects its revenue to double every year through 2024, when it estimates sales will reach $8 billion. Overall, AJAX stock’s 40 percent pullback from the 52-week high has opened a discount entry opportunity to Cazoo.

AJAX stock will immediately convert to Cazoo stock after the transaction closes. As a result, AJAX investors will become shareholders in Cazoo.