What’s Schaefer’s “The Next Uber: The Backdoor Way to Profit from the Rideshare Revolution?”

What's being teased in the ads for Investing Whisperer?

By Travis Johnson, Stock Gumshoe, October 22, 2019

Today I’ve got a new service to look at — it’s from Keith Schaefer, whose Oil and Gas Investments Bulletin we’ve covered a few times over the past decade or so… but this time he’s getting away from energy stocks with a service he calls Investing Whisperer (currently $999/yr for “charter members”). He has also done some “promoted” stocks where he was paid by the company in the past, but those were disclosed and this appears to be an actual recommendation he’s teasing.

The basic gist of the ad is summed up here:

“I believe there are still fortunes to be made investing in ride sharing… but anyone investing in Uber today is likely to lose money.

“If you want to make money in the technologies changing the world today, you just have to look a little bit harder…

“All of the cash being invested into the ride-sharing space (and the billions Uber and Lyft are losing every year) are flowing somewhere…

“And thanks to the Schaefer Method, I found the tiny company that’s vacuuming up those dollars…

“As Uber and Lyft provide more and more rides, this company makes more and more money.

“Even better – its success isn’t just tied to Uber and Lyft. As basically any of the ‘gig economy’ platforms that require drivers grow – like Postmates, Amazon, TaskRabbit and GrubHub, just to name a few – this small company will profit…”

He provides some numbers for why he thinks this is an “unstoppable trend,” including this…

“Only 10 years after it began, Uber has booked 10 billion rides. And it’s on pace to book more than SIX BILLION rides a year (and growing).

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“But even after that impressive growth, the company is only responsible for 1% of all miles driven globally.”

And then starts to hint at the little stock he’s recommending…

“This company is tiny (less than one-one-hundredth the size of Uber). It’s not on anyone’s radar.

“And as ride-sharing demand continues its growth, this company’s profits (and market cap) should absolutely soar.

“I call this company ‘The Next Uber.'”

So what does this company do? Apparently it is filling a need for Uber and Lyft…

“Right now, the biggest problem with Uber and Lyft’s business model is a shortage of drivers…

“Both companies admit they don’t have enough drivers in most of their markets.

“And to make things worse, around 40% of drivers that apply to drive for Uber and Lyft can’t get an approved car.

“That works out to 20,000 drivers a month that want to drive but can’t.

“And these platforms need more drivers, not fewer…

“More drivers mean shorter wait times and better service for riders… which leads to more customers and more revenue.

“But if the platforms can’t attract enough drivers, customers will go somewhere else… and the whole business falls apart.”

What does this little stock to do attract more drivers, then? Apparently they rent cars to drivers who can then use them to take Lyft or Uber calls or deliver stuff for any of the many services out there…

“When a driver rents a car through The Next Uber, they’re paying as little as $290 a week – 22% cheaper than competitors.

“In addition to costing less than competitors, drivers can also get approved much quicker when they sign up with The Next Uber – I’m talking as little as 12 hours versus two to three weeks with a company like Hertz.

“The Next Uber also allows drivers to drive on any platform… they can earn money with Uber, Lyft, Amazon, GrubHub, TaskRabbit, etc.”

And some more info about this “next Uber” …

“The Next Uber matches up drivers to either private car owners (people like you and me) or car dealerships that have idle cars with drivers that need a car.

“And it collects revenue all along the way… the company takes a fee from the vehicle owner and the vehicle renter. It also makes a profit on the insurance it provides its customers.

“It doesn’t carry any inventory of its own… so it’s ‘asset light’ and doesn’t require loads of capital to operate the business.”

That all sounds good… providing a matchmaker service for car owners and people who want to be Uber drivers. Is there any other info from Schaefer to help out the Thinkolator? We do get a bit more…

“Asset heavy guys (like Hertz) are only offering this service because Uber/Lyft are subsidizing the programs. Otherwise, they’d lose a ton of money…..

“The Next Uber is getting 25,000+ new driver leads each month. But it currently only has a couple thousand cars to rent out (remember, this company is very new).

“But this is a great problem to have…

“This tiny company has 10 times the demand for its product than it can supply.”

And a couple other clues hidden in the hype…

“In March of 2019, The Next Uber added its 100th dealership to their platform (with 1,200 cars). That includes one of the nation’s top 20 dealerships (with 40 stores around the country).

“In fact, adding more dealerships is The Next Uber’s No. 1 focus right now…

“And it’s working… The Next Uber already has a backlog of 200 dealerships that it’s onboarding onto the platform.

“And it has 750 more dealerships (and counting) in the pipeline….

“An executive at The New Uber, whose previous job was building the largest Ford dealership in the world, believes the company will have 10,000 cars on its platform by the end of 2019.

“And it’s only about 1,000 cars away from profitability right now… which it should hit any day now.”

Schaefer says that this is “on the cusp of positive cash flow,” which is certainly a lot more than Uber and Lyft can claim.

So why would car dealers do this? From the ad:

“The Next Uber’s service helps dealers in three, big ways…

“It monetizes the extra cars sitting on the lot by renting them out

“Each driver that rents a car from a dealer is a potential, future customer

“The extra miles drivers put on those idle cars allow dealers to earn factory rebates when they sell the cars as ‘certified pre-owned.’

“Yes, The Next Uber’s service is great for dealerships.

“But it’s also great for The Next Uber. The dealership pays The Next Uber every time a car is rented. So does the driver… “

And Keith sums up his argument:

“It checks all my boxes for The Schaefer Method…

*The company is on the cusp of profitability

*Insiders own a bunch of stock

*The company has huge scale

*It doesn’t need to raise money

*Its model is proven in all 50 states”

Other clues? We’re told that it “grew 138% last year”, and that company insiders are also loading up on stock”… and that “you can invest in this opportunity right away with any online brokerage. And you can invest as little as $20 to get started.”

So that’s plenty of clues, right? Hoo dat?

Well, you can actually invest a lot less than $20 if you want… Thinkolator sez this is HyreCar (HYRE), which currently trades for about $2.30 per share. Here’s the company’s description of itself:

“HyreCar Inc. (NASDAQ: HYRE) is a nationwide leader operating a carsharing marketplace for ridesharing in all 50 States and Washington D.C. via its proprietary technology platform. The Company has established a leading presence in Mobility as a Service (MaaS) through individual vehicle owners, dealers and OEM’s, who have been disrupted by automotive asset sharing. By providing a unique opportunity through our safe, secure, and reliable marketplace, HyreCar is transforming the industry by empowering all to profit from Mobility as a Service.”

This is how they described themselves previously, they seem to have dropped the “peer to peer” language at some point in 2018 for most of their promotional materials…

“HyreCar Inc is a peer-to-peer car-sharing marketplace that allows car owners to rent their idle cars to ride-sharing service drivers. The company generates its revenue in the form of transaction fee, an insurance fee, and from other sources such as referrals, motor vehicle record fees, late rental fees, and other fees charged to drivers in specific situations.”

So the story has been evolving over the past year or so, with recently much less focus on the “peer to peer” rental part of the business (which you might think of as essentially, “Airbnb for cars”) — which makes sense, because they’ve spent most of their first year as a public company building up a network of car dealerships that should, at least theoretically, help them to scale their available fleet of rental cars much more quickly, reliably and easily.

And they are growing the top line nicely — just yesterday they announced a new deal with some large dealerships that they think will help add 1,000 cars to the marketplace “soon,” and a similarly large deal was announced in September. So things are moving in the right direction on the “growth” front, though the stock has yet to really get any traction… so what’s going on with the company right now?

They’re due to report in a few weeks, so the numbers are getting a bit stale, but as of the June 30 quarter (announced in mid-August) they were reporting revenue of $3.8 million (growth of 67% year over year) and some indication of improving margins (gross profit grew 114%, earnings were still negative but grew by 92%). The adjusted earnings grew slightly over last year, but adjusted earnings per share fell pretty sharply because of their IPO in July of 2018 and some follow-on fundraising (they had 5.5 million shares in the second quarter of 2019, 12.2 million this June… and now, after another raise in July, about 16.6 million).

Companies that have a consistent need to raise money do get attention from investment banks, which means they sometimes get analyst coverage — even if they’re tiny like HYRE. Ladenburg Thalmann is one of those banks that targets microcaps, they’re also a market maker for HYRE and they have a price target of $8.25 on the shares, here’s the summary of their valuation methodology from a July 2019 analyst report (the shares were around $3 at the time):

“Our valuation is based on the average of a P/E calculation using our non-GAAP per share cash earnings estimate for 2020 ($0.26) with a 30x multiple and a Price/Sales multiple of 4.5x on our estimated 2020 revenues ($31.75 million). This average equates to a value (and price target) of $8.25.”

For what it’s worth, Taglich Brothers, a firm I’ve never heard of. also published a research report on HYRE — their target is a more conservative $4 a share, but the report is a year old now.

The competitive nature of the car-leasing marketplace is pretty clear, and it revolves mostly around the fact that they are a minnow trying to connect giants with other giants ((Uber and Lyft and the big delivery companies are way more than 100X larger than HYRE — UBER, in fact, is more than 1,000X larger, and the car rental companies, dealer networks and insurance companies are likewise large, powerful and established)… which means that even if they beat the competition they could be squeezed out if any of those companies decide they want to try to do it better or cheaper than HYRE (Uber and Lyft, for example, have each tried to get into the leasing business as well, with mixed success). And, of course, there’s also direct competition in the form of other marketplace, peer-to-peer, or centralized car leasing firms, including the big car rental companies, who also see the large pool of Uber and Lyft drivers as an appealing customer base.

It seems that HYRE is emphasizing both the connection with car dealers and their idle fleets (of used cars, I assume, or maybe “used and also hard-to-sell new cars”), and also their connections with an insurance partner (part of The Hartford) that lets them offer a cheaper insurance coverage option for both vehicle owners and drivers. So if you add on to that the fact that they are platform-agnostic, they don’t care whether you drive for Uber or Lyft or GrubHub (or all of them), I can see that they might have a defensible business if they can scale it up quickly enough and sign up enough drivers and car owners.

And that’s where they are right now, trying to scale it up — it seems that their pool of interested drivers is large, and they’ve had some luck in signing up large dealership groups who also offer those drivers a “rent to own” option as part of the deal in addition to the relatively quick and low-cost signup to rent a car, so maybe that’s enough to keep them going. I don’t really know, the business is changing fast and costs are rising as they bring on more drivers and more inventory, so it’s a judgement call as to whether or not they’ll be able to approach a cash break-even point in the next 6-12 months. It’s certainly possible — unlike Uber and Lyft’s models, which continue to not make much sense unless they stop competing on price, the HyreCar business model of providing a matchmaker service with fees to both sides and a profit margin on insurance coverage is scalable. At least theoretically.

If you’re interested in what the other options are for these folks who want to start driving or delivering but don’t have a car they can use, there’s an interesting comparison here — I don’t know if its exhaustive, but it gives you some idea of the variety of options available… no surprise, there are plenty of private companies and startups who are trying to meet this need.

My major concerns after a few minutes of looking at the numbers are twofold: First, that I don’t really understand where the “fleet” cars come from unless they’re just essentially making a market for unwanted new cars that are sitting on dealer lots, and that doesn’t seem terribly sustainable to me since no dealer wants to turn their new cars into used cars (though maybe getting drivers signed on with a “rent to own” option would be sustainably appealing to these dealerships); and Second, that the focus on near-term profitability might itself be a problem, because it’s hard to imagine this company making sense as a business with a $50 million or $100 million valuation.

The one real competitive advantage they seem to have over huge and well-funded companies like Uber and Lyft is that they can offer flexibility and let their cars be used for more than one platform, while an Uber-owned leasing program would presumably restrict you to driving for Uber, and I imagine they need quite a bit more scale to make that a nationally attractive option for drivers or fleet owners. This business makes a lot more sense to me as a large “matchmaker” for drivers and car owners that can gradually cut prices to keep growing the business, and that would require raising a lot more money and marketing much more heavily to try to grow faster. And frankly, it might make more sense if they were owned by a big auto dealer network or a car rental company that are looking for profitable outlets for cars in that “not new but good enough for Uber” category.

Just looking at the numbers, I can see why Schaefer is interested… it is nice and fairly rare to find a small company with fast revenue growth and a business that looks very scalable, particularly at a microcap size. And I can see why it might be worth speculating in the shares if you can take the risk, particularly because the company is so small, with a market cap now under $40 million, that it’s fun to daydream about what might be if it really takes off. But the flip side of that tininess is that the company has so many partners who could squeeze it before it got big that it’s hard for me to be completely convinced after a few minutes with the financials… and I’m betting they need to raise a lot more money and grow fast if they want to take a solid share of this business before a bigger player steps in, which is tough because investors hate to see $2 microcap stocks raising more money by selling more shares. I’ll keep it in the back of my mind and might check back in with them, but so far I’m on the fence — their August investor presentation is here if you want more of the lowdown, and they’ll probably report earnings again in about three weeks.

With your money, though, it is naturally your opinion that matters, not mine… so if you see something to like or loathe about HyreCar, please do let us know with a comment below. Thanks for reading!


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Gary
Guest

They turned to dealers because retail car owners don’t use the platform. It is labor intensive, convincing dealer, then doing pilot at dealer, then scaling up. Despite earlier claims of cash flow positive they had to do secondary to raise cash. It raises the question about cash flow positive with low growth or cash flow negative with high growth. It is selling for several times sales while big rental companies are selling for a fraction of revenues

Buck
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Buck

I’m skeptical. To me, we have seen Uber et al enter a capital intensive market, cost shift the capital to indivuduals (aka drivers), then cut passenger rates to unprofitable levels. They’ve grown by placing clever ride hailing apps on mobile phones. But now we are to the place where they need to either fish or cut bait. Driverless day dreams create even more subterfuge. But the central issue of “Where’s the capital come from and who’s going to eat all of the depreciation on that capital ? still exists. So far, the only answer is from a lot of unemployed… Read more »

Vetri
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Vetri

The core value proposition is to connect drivers without cars to cars. What happens if there is no need for a driver…that is when autonomous driving arrives….. that’s a real risk…though it may be years away….

profits101
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profits101

I think this is a pump also… https://tailwindsresearch.com/2019/10/hyrecars-increased-vehicle-supply-explained/

Tom
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Tom

Rather than “the AirBnB of cars”, this seems more like “Zipcar for wannabe drivers”. I’m convinced that Zipcar’s model was to get bought out by the likes of Avis. The edge that Uber has over a taxi is that in most markets the driver leases the taxi by the day whereby the Uber driver “rents” his vehicle by the trip. That “rental income” (the savings over the cab driver) is the linchpin because it results in lower cost. This proposed model seems destined to increase the cost of the rideshare in a market that is already overcrowded.

rail jockey
Irregular
👍35

https://seekingalpha.com/article/4211446-hyrecar-failed-experiment HyreCar: A Failed Experiment Oct. 13, 2018 4:08 PM ET|16 comments | About: HyreCar Inc. (HYRE) Gary Alexander Software, internet, media, IPOs (9,817 followers) Summary HyreCar, a small-cap recent IPO that rents cars to aspiring Uber drivers, has tumbled to less than half of its IPO value in three months. The company has a market cap of just over $25 million. HyreCar’s CEO has reiterated a promise of hitting cash flow positive by 2Q19, but the company’s cash could very well run out by then. The extreme risk associated with such a tiny company makes an investment extremely unattractive.… Read more »