Looking back on the year, we have a lot to choose from, but here are the top ten themes that most impacted the automotive industry.
1. COVID Crisis
The rapid spread of the coronavirus forced auto factories across North America to shut from March into May. Thousands of dealers and other small businesses received emergency federal aid. Office workers began working remotely — and many are expected to continue doing so well into 2021. Dealerships, some of which temporarily had to close all or parts of their operations under government order, reinvented themselves with new sales and service processes that minimized face-to-face interactions.
2. Resilient Auto Sales
Vehicle sales were hit hard by the pandemic before showing surprising resilience throughout the remainder of the year. After starting the year strong, they plunged to an annualized rate of just 8.8 million in April amid state- and local-government ordered dealership shutdowns. But sales shot higher again as homebound consumers flocked to generously discounted pickups and SUVs, and commuters wary of public transit opted for a privately owned vehicle instead.
The annualized selling rate returned to more than 16 million by September and has stayed in that range since, despite lingering vehicle shortages caused by the spring factory closings and a fall surge in coronavirus cases around the country.
3. The Convenience Economy
While COVID forced millions of people to shelter in place, consumers spent more time and money online watching Netflix, viewing ads on Google and Facebook pages, filling Amazon shopping carts, exploring online learning, finding home-exercise options, and turning to online video games. Ecommerce became a lifeline for millions of people reluctant to leave their homes, as its adoption accelerated by close to a decade in a matter of months.
After years of talking about the possibilities of online sales, dealers were forced to embrace digital retailing efforts to keep selling vehicles while in many cases showrooms were forced to closed (or consumers wanted to avoid visiting them). Public dealership groups launched online brands such as Lithia’s “Driveway” and Asbury’s “Clicklane. Wholesale auctions also pivoted to digital formats; KAR sees the change as a permanent safety and efficiency improvement, while Manheim has resumed limited in-person auctions. Online players such as ACV Auctions, TradeRev and CarOffer saw tremendous growth.
Dealership service departments rolled out more contactless options, from mobile check-in capabilities to mobile service vans. While auto repair generally was considered an essential service during the spring shutdowns, dealerships expanded their use of pickup and delivery of customers' vehicles, bringing greater convenience at a time when customers were concerned about health and safety.
The interest in online selling buoyed Carvana’s stock price this year, generated a lot of interest from investors outside the automotive industry, and provided tailwinds for Vroom and Shift to go public. Vroom raised $468 million through its initial public offering in June. Shift Technologies went public via a special-purpose acquisition company, or SPAC, in October. That same month, CarLotz announced it would go public through a reverse merger, which is expected to close in the first quarter of 2021.
“It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish the prices were a little higher,' [or] 'I love Amazon; I just wish you'd deliver a little more slowly.' Impossible. And so, the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”
4. EV Investments
2020 saw numerous electric vehicle (EV) manufacturers take the opportunity to go public, notably via SPACs. This year saw Fisker, Nikola, Canoo, Lordstown Motors, and Hyliion go public.
Many of the legacy OEMs indicated they were aggressively increasing their bets on EVs. GM boosted its planned spending on electric and autonomous vehicles by 35 percent to $27 billion through 2025. Volkswagen committed $41.5 billion through 2025 just for battery-powered vehicles. Ford is spending $11.5 billion on EVs and hybrids through 2022. Hyundai and Kia are planning to spend a combined $43 billion through 2025 on EVs, purpose-built vehicles and other new technology.
5. COVID Cancels Conventions
This year would have been my 22nd National Auto Dealer Association (NADA) show in a row, and it’s sad that I’ll miss it. It just won’t be the same attending virtually. NADA weekend is one of my favorite of the year, as I get to see industry folks that I otherwise never get to catch up.
In addition to NADA shifting to virtual, so have the big auto shows. It started with the Geneva auto show's last-minute cancellation and snowballed from there. New York, Los Angeles and Detroit were all show-less in 2020.
As a result, automakers had to find new, digital ways to create excitement and awareness for new vehicles. Software vendors needed to find new ways to prospect dealer customers.
6. Unprecedented Profits
Rolling the clock back to the beginning of the pandemic, I would have predicted that we were in for a hard year which might see thousands of dealerships go out of business, as consumer demand disappeared. Ironically, the opposite happened -- dealers and OEMs reported record profitability in Q3 2020.
Tight new and used inventory supply occurred as both supply dried up (auctions were either closed or running at partial capacity and new car plants were forced to close for some time) and demand strengthened. Both factors drove record profits across the dealer body and strong third quarters for most automakers, as they didn’t have to discount vehicles, and gross profit per car held strong.
7. Markets and SaaS Valuations at All Time Highs
The S&P 500, the Dow Jones industrial average and the tech-heavy Nasdaq all ended 2020 at or near their record highs, even as a deadly pandemic claimed the lives of more than 340,000 Americans and left millions jobless and without enough to eat.
Wall Street’s resurgence has been fueled by the largest federal government stimulus ever, historic support from the Federal Reserve and optimism about how quickly the economy is likely to bounce back next year as coronavirus vaccines become widely distributed. Investors have largely ignored the ongoing pain on Main Street, including pronounced unemployment, overrun hospitals and battered small businesses. On the eve of the new year, nearly 10 million people remain out of work, and we face a jobs crisis worse than anything seen during the Great Recession.
Investors are focused on the future. Stocks are a forward-looking mechanism. They don’t care about what is happening right now or what happened in the past. Goldman Sachs predicts growth of 5.9 percent next year — the best annual increase since 1984. And the unemployment rate is expected to fall to 5 percent, according to the Federal Reserve, meaning 2 million more people could return to work. Corporate earnings are forecast to balloon in the second half of the year, and crucially, stocks remain appealing for many investors because interest rates are so low, making them more attractive than other kinds of assets, such as bonds.
The market’s gains have also been driven largely by a handful of superstar stocks, a scenario eerily reminiscent of the dot-com era. Three of the biggest tech giants — Apple, Amazon and Microsoft — accounted for more than half of the S&P 500′s return in 2020. Absent the top 24 companies, which are dominated by tech and digital services, the S&P 500 return would have been negative in 2020.
As technology stocks have led the market higher, Software-as-a-Service (SaaS) multiples have hit an all-time high. The median public SaaS company valuation multiple was at 15.6 times Annual Recurring Revenue Run-Rate (ARR) as of year end, the highest it’s ever been. Multiples are high due to a convergence of factors, including monetary easing, trillions of dollars chasing investable targets, and an adoration of the SaaS business model.
8. Tesla Soars
2020 was a great year for both Tesla and Elon Musk. Elon is now the world's second-richest person, as Tesla became the most valuable automaker by far, eclipsing long time No. 1 Toyota by 150 percent at the start of December. The California company opened its first plant in China and started construction in Germany and Texas, and Tesla remains the fastest growing auto brand, in the U.S. as well as worldwide.
Tesla’s buoyant market capitalization ($669 billion at the start of 2021) has fueled more interest in other EV manufacturers, many of which went public in 2020 via SPAC.
9. Blurring of Lines Between Retail and Wholesale
I’ve spoken numerous times about the blurring of lines between wholesale and retail, which seems to be happening at an accelerated pace.
Maybe the best example of this blurring is CarGurus’ investment in a majority of CarOffer at a $275 million valuation. The move will allow CarGurus to provide a more end-to-end used car solution for their dealers, who can now source, appraise, price, advertise and dispose of used cars on their lot. This should allow CarGurus to go deeper into dealers’ wallets and make the product stickier (i.e., less churn).
Another trend in 2020, which really came to the forefront due to months of used inventory supply shortages are services that enable dealers to source private seller (“for sale by owner”) vehicles. Companies playing in this space include Drivably, Vettx, Boost Acquisition and Vehicle Acquisition Network (VAN). Dealers no longer need to solely rely on sourcing used vehicles from auctions or through dealer trades.
Companies who might have historically been viewed as dealers are starting to blur lines into the wholesale auction space. The largest retailer of used vehicles, CarMax, runs the third largest auction company in the country, with over 70 locations. CarMax sells over 400 thousand wholesale vehicles per year through these auctions. And remember that CarMax made a $50 million dollar investment in online shopping site Edmunds in early 2020, which raised a lot of eyebrows.
Carvana launched CarvanaACCESS in 2020, powered by Manheim’s OVE. Like CarMax, Carvana needs an efficient way to dispose of trade-ins and aged inventory they don’t need.
Finally, used car consignment company CarLotz announced that it will be going public in early 2021 via SPAC, with a vision of offering fleet cars directly to consumers.
10. 2020 is The Year of the SPAC
SPACs, often called blank-check companies, took the opportunity in 2020 to disrupt the traditional IPO market. SPACs are flourishing in the electric vehicle (EV) market, helping startups to avoid the complexity and strenuous paperwork associated with the traditional IPO. Many EV companies chose to go public this year via reverse mergers with SPACs, a faster, simpler and less demanding process than the conventional means of making a debut on the stock market.
We will exit 2020 with over 473 IPOs, a nearly quadrupling of IPO count, and the most in any calendar year, ever. The next closest year was back in 2000 with 397 IPOs -- at the peak of the Dot.Com bubble.
Much of the interest in the automotive space has been fueled by Carvana’s high market capitalization, as well as a COVID-inspired interest in online automotive shopping experiences. Specifically, Vroom IPO’d earlier this year, followed by competitor Shift Technologies going public via SPAC. And we already mentioned that CarLotz is coming to market shortly. All of these players are enjoying the tailwind of Carvana’s stock price being up 200% in 2020 to just shy of a $50 billion dollar market cap.
Only time will tell if consumer demand can support all of the EV automakers that went public in 2020. But in the meantime, it definitely was the YEAR OF THE SPAC, and I don’t see this trend slowing down as we enter 2021.