Company Overview
PARTS iD (NYSE:ID) is a leading digital e-commerce company that went public via a SPAC between Legacy Acquisition Corp. (sponsor) and Onyx Enterprises last year. After the deal, the combined entity was renamed PARTS iD, Inc. The company is focused on creating custom infrastructure and unique user experiences within niche markets. With the development of CARiD.com and other verticals launched in 2018, management is striving to develop a one-stop-shop for the aftermarket auto parts and accessories markets.
Understanding the Business
New Jersey-based PARTS iD markets to niche segments through its e-commerce platforms. The company was established with an aftermarket auto parts focus, and has since expanded, leveraging its CARiD brand, to boats, motorcycles, power sports, recreation and more, as of 2018. The PARTS iD enterprise has built extensive platforms to meet the varied needs of consumers. This comprehensive and complex portfolio includes over 17 million SKUs with 95% product coverage, 14 billion vehicle parts-related data points, nearly 5,500 active brands, and an AI-powered algorithm which provides solutions to complex problems like fitment.
Source: 10-K Filing, Figure 1: Leveraging ID brand to launch seven new verticals
PARTS iD’s technology infrastructure integrates software engineering with catalog management which applies rules-based parts fitment logic. The AI model accurately identifies the exact part or list of choice parts that would fit a specific model. Furthermore, the company has concentrated its effort on building a superior user experience by adding installation videos, 3D images, and fitment guides. PARTS iD has allocated sales and service personnel to clarify and answer any questions regarding the product. The company’s AI-powered algorithm and top-tier customer service are reflected in its numbers, a return rate of close to 5% compared to the 20% industry average.
Source: Investor Presentation Figure 2: Addressing the Fitment Problems
The company has identified a niche customer segment within the do-it-yourself (DIY) market, which constitutes a substantial part of the company’s customer base. Management made the strategic decision to apply focus to the do-it-for-me (DIFM) segment, which accounts to close to 80% of the total automotive aftermarket industry. The DIFM segment includes larger and more complex parts which are geared towards the professional consumer, and range from transmission control to exhaust systems.
To drive its DIFM segment, the company has successfully partnered with 2,000 tire installation locations, and is on track to partner with 7,000 more by year-end. This initiative will allow consumers to select from a more expansive variety of tires, and conveniently choose a tire installation center nearby via an online appointment. The company’s combined deep-dive data analysis and applied proprietary algorithm provide the company with a unique competitive advantage, especially in the DIFM category, where fitment issues are of significant concern.
The brick-and-mortar and select e-commerce retailers carry a limited number of SKUs in most-sold categories, including batteries, air filters, car tires, and wheels. PARTS iD has a cost-efficient inventory model which allows for a higher PAT to free cash flow conversion rate. The company incorporates a just-in-time inventory model wherein PARTS iD carries minimal inventory, i.e., predominantly private label products. PARTS iD has partnered with over 1,000 vendors. They utilize their proprietary algorithm to determine from which vendor to source when a sale is made, while also taking into account inventory availability, customer proximity, shipping cost, and profitability. The comprehensive process minimizes inventory carrying risk while simultaneously creating an asset-light business model.
Figure 3: Financial overview of the company
The company has invested heavily in building and enhancing its AI-based platform, incorporating key features that address current issues, and spur the purchasing of auto parts and accessories online. PARTS iD’s improvement in the buying experience with each purchase is reflected in its numbers. The business was built on high fixed costs which is the benefit of operating leverage. Gross margins have been low due to sourcing costs and operating within a determinedly price-sensitive DIY segment.
Figure 4: Margin Profile of the company
The company’s revenue growth has been steady at around 20% with the exception of 2019. The recent growth spurt, due to COVID, is likely to stabilize at 20-25% moving forward. The SG&A expense has been largely fixed except for the advertising costs. The company has spent heavily, compared to the past, in building its brand (discussed in detail below). As the company starts to build volume in the DIFM and PRO consumer categories, cost savings and higher margins are expected. The company has barely turned profitable, but has the potential to generate a significant amount of cash year on year. Its asset-light business model and negative working capital are two primary reasons supporting its cash-generating capability.
Source: Investor Presentation Figure 5: Asset
light and capital-efficient business model
In 2018, the company replicated its business model from auto parts and accessories to seven new parts and accessories vertices – semi-truck, power sports, motorcycle, recreation, tools, boating, and RV/Camper. The total order value for these seven verticals has reached close to 10% of the company’s total order value. This segment also registered a growth of over 80% in the first quarter of 2021 compared to the same quarter of the previous year. The company’s strategy is to incorporate more DIFM and professional consumers. Bridging the gap between online and offline and applying its value-added services, is likely to increase PARTS iD’s average order value and conversion rate. Growth in new verticals and geographies will help in creating a diverse and scalable business.
Industry Overview and Competitive Positioning
The entire aftermarket automotive industry is valued at $400 billion, with close to a 5% online penetration rate, compared to 32-35% of the furnishing industry and an overall e-commerce market penetration rate of close to 22%. The major reasons for low penetration are attributed to product complexities and fitment issues. The majority of online sales comprise the DIY category. The online aftermarket automotive industry is ripe for double-digit growth owing to an increased online consumer adoption rate and value-added services.
The online aftermarket automotive industry is majorly dominated by 3P e-commerce players like Amazon, Alibaba, eBay, followed by Advance Auto Parts, O’Reilly, and AutoZone. A staggering 70% of all car parts in the US are sold on e-commerce platforms like Amazon and eBay. These players have a high degree of network and logistical support, but lack the niche and value-added services that PARTS iD strives to provide. PARTS iD’s competitive edge lies within its proprietary algorithm, which allows it to catalog, and source the product effectively and efficiently.
Compared to a brick-and-mortar store, PARTS iD offers a better selection range and shopping experience while also addressing the fitment challenges. The only place where the company is lacking is in its brand image and product marketing. It has been observed that the majority of consumers do some form of online research prior to purchasing an auto part or accessories.
On the online front, the company which is the closest competitor, in terms of scale and market value, is carparts.com. The competitor has fewer than a million SKUs and minimal categories compared to the more than 1,000 categories and 17mm SKUs offered at iD. In contrast, carparts.com operates with an asset-heavy business model, different from iD’s asset-light model. Another comparable company is tirerack.com which focuses entirely on tires. Well-positioned in the industry with unique offerings, tirerack.com addresses the issues with which brick and mortar stores and traditional e-commerce channels are challenged.
Marketing and Brand Awareness
The advertising spend has been in the range of 7-9% of sales over the past four years. The company uses a two-prong approach to marketing and brand awareness, paid and non-paid advertising. The paid advertising bucket largely funds search engine marketing, paid social media, TV ads, and paid partnerships, whereas the non-paid covers SEO and email marketing.
Source: Investor Presentation Figure 6: Advertising Spend as % of Sales
PARTS iD derives approximately 66% of its revenue from search engines like Google. It is also responsible for 77% of the traffic on the company’s website. Any SEO campaign you manage depends on the keyword you select; choosing the right keywords is essential to getting more real-time traffic from search engines. There are over 8,000,000 US-based online searches for “auto parts stores” alone, each and every month.
Even though the company’s advertising spend has been in the range of 7-9% of sales, it has increased in tandem with the increase in sales in absolute terms. This is likely to expand further as the company plans to increase its advertising through connected TV, video, and social media advertising while continuing to maintain its SEO positioning in the marketplace.
Risk Profile
1. According to the latest quarterly filings, the company has a $37.4 million cash balance on its books. Management has not provided any clarity regarding how it will utilize the excess cash.
2. There has been a sudden spurt in the growth rates owing to COVID-led demand. There is a risk of a significant reduction in growth rates as people move out to brick and mortar stores for their requirements.
3. The company has historically concentrated on the DIY segment, which is generally cyclical in nature. People would delay their wants but can’t delay their needs.
Conclusion
PARTS iD has developed an asset-light business model with negative working capital growing at a decent 20% growth rate. The company has taken the necessary steps to create awareness about its offering in the market. This is likely to complement the growth trajectory. COVID has shifted the purchasing behavior of consumers from brick-and-mortar stores to e-commerce platforms which have accelerated in growth over the past year. The company was able to grow its revenue at 40% in 2020 compared to an average growth rate of 18-25% in previous years. This growth is likely to normalize further at around 20% going forward.
Source: Investor Presentation Figure 7: Expected revenue of the company
The above table provides an estimate of the company’s revenue forecast for the next five years. With an increase in online penetration and a gradual increase in the company’s market share, PARTS iD’s revenue growth rate comes out to be 18-20%. The market is yet to realize the company’s potential and is thus valuing it at just 0.6x Price to Sales. The company’s EBITDA and PAT numbers are likely to grow at a much faster rate as operating leverage leads to margin expansion.
Source: Investor Presentation Figure 8: Sensitivity analysis
The company’s potential upside organized in the above sensitivity table is calculated based on its 2022E revenue and P/S ratio. On a base case scenario, with 2022E sales of 563.0 million and a P/S ratio of 0.75x, PARTS iD will be valued at $422.25 million or $12.75 per share, implying an upside of over 60%. In the bear case scenario, we may observe a time rather than a price correction.
At the current valuation, the company’s risk/reward scenario looks favorable for prospective investors and presents itself as a good portfolio addition.
I remain bullish on PARTS iD.
