Baron Funds, an asset management firm, published its “Baron Growth Fund” first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 0.94% was delivered by the fund’s institutional shares for the Q1 of 2021, trailing its primary benchmark, the Russell 2000 Growth Index, that rose to 4.88% and the S&P 500 Index that delivered a 6.17% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Baron Growth Fund, in its Q1 2021 investor letter, mentioned ACV Auctions Inc. (NASDAQ: ACVA), and shared their insights on the company. ACV Auctions Inc. is a Buffalo, New York-based automotive marketplace that currently has a $4.6 billion market capitalization. ACVA delivered a -14.37% return in the past month, and as of May 12, 2021, the stock closed at $30.10 per share.
Here is what Baron Growth Fund has to say about ACV Auctions Inc. in its Q1 2021 investor letter:
“During the quarter, we took advantage of the market’s focus on cyclical stocks to initiate an investment in ACV Auctions Inc. We believe that ACV is a compelling secular growth business that is using technology, data, and analytics to disrupt the wholesale automotive auction market. We view this as a vast addressable market dominated by incumbents burdened by significant real estate footprints and legacy processes ripe for disruption by an agile digital-native competitor.
We intentionally keep our new investments small as we build confidence in our investment thesis and managements’ ability to execute. Our new position in ACV reflects this philosophy, and we are working closely with our growing team of analysts to enhance and refine our understanding of this business and its opportunity.
This quarter the Fund participated in the IPO of ACV Auctions Inc., the market leader in digital wholesale vehicle transactions. We believe that ACV is a compelling secular growth business that is using technology, data, and analytics to disrupt the wholesale automotive auction market. We believe that ACV is targeting a vast addressable market. We estimate that there are approximately 40 million used car transactions annually in the U.S. alone, around 75% of which are sold by dealers to consumers. To have a sufficient inventory of used vehicles to sell to consumers, dealers conduct approximately 22 million wholesale vehicle transactions every year, which corresponds to approximately $230 billion in gross merchandise value annually.
Given the fragmented nature of dealers, with over 38,000 independent used car dealers and 16,500 franchise dealers, wholesale transactions are largely facilitated by marketplaces connecting buyers and sellers. The market has been traditionally served by physical auctions held by Manheim, ADESA, and over 200 independent NAAA auction houses. These vendors account for close to 10 million units per year, with other transactions occurring through private auction platforms or in a more informal manner.
Today, digital transactions represent just 5% of all wholesale transactions, with ACV leading the digital market with approximately 40% market share. Digital auctions offer many benefits to dealers including the convenience of accessing auctions from anywhere, avoiding transportation costs and time spent at physical auctions, and increasing the potential buyer base for every vehicle. We believe that COVID has meaningfully accelerated the transition of physical-to-digital auctions. During 2020, digital penetration jumped by 4 times in certain territories versus pre-COVID levels, and we ultimately
believe that ACV’s volumes can increase by a factor of 10 times.
We believe that ACV has developed meaningful competitive advantages. The company’s digital-native footprint and current-generation technology stack create a sustainable cost advantage versus legacy incumbents, who are burdened by meaningful real estate and personnel expenses. The company’s value proposition is focused on delivering trust and transparency to buyers
and sellers. Its captive team of 750 vehicle inspectors use ACV’s proprietary technology to generate best-in-class inspection reports that measure and report on 100 unique vehicle attributes. With each transaction and inspection, ACV collects incremental data, which can further help enhance its market insight and product offerings. Finally, we expect ACV to benefit from flywheel effects as the growing number of buyers on the platform will attract more dealers to sell through the platform, and more inventory on the platform will entice more buyers.
Currently, ACV collects a nominal buyer and seller fee for each vehicle bought and sold on the company’s platform. We see ample ways to enhance monetization by selling high-margin ancillary services such as transportation, floorplan financing, and “Go Green” seller’s assurance. The “Go Green” offering is the first of its kind in the industry that shifts the risk of the car not being as represented in the inspection report to ACV. We believe that ACV’s inspection capabilities and vast data set enable it to offer this service profitably, while competitors would likely lose money if making a similar guarantee. Over time, we believe that increasing attach rates of ancillary services can increase the revenue per vehicle by around 20%, and the profit per vehicle by almost 50%. We also expect the company to identify additional ways to monetize its data assets in a profitable and recurring manner, which should be meaningfully additive to financial results.
As with all our investments, we believe that ACV is run by a best-in-class management team. The company was founded by former car dealers, who understood the opportunities and pitfalls of the industry. CEO George Chamoun, who founded Synacor in 1998, joined in 2016 after being an early investor in the company. George has built out a management team replete
with technology industry veterans who have helped craft ACV’s advantage as a digitally-native data-first disruptor. The management team remains focused on culture and has hired from, and modeled itself after, many best-in-class culture organizations.”
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