HYRE is a Micro-Cap Stock Offering Investors access to the “Gig Economy”
Today, we are living in a period which has seen a seismic disruption of the economic establishment. Established industries such as cable, taxis, food delivery, and many others, have seen a shift towards on-demand, or as a service models within their end markets. These new models have created disruptive companies who pose a significant challenge to the established market leaders.
A prominent example of disruption in a major economic industry has been the introduction of ride-sharing, which has created a whole new industry and significantly disrupted the established taxi market. The growing global ride-sharing market is currently led by two companies, Uber and Lyft. According to Morgan Stanley and UBS Q Labs research, the ride-sharing market is forecasted to reach ~$1 trillion dollars by 2030 versus roughly $25 billion in 2015. As of today, both market leaders are private companies, not offering investors an opportunity to purchase shares via public markets or participate in potential growth opportunities. While Uber has discussed a potential initial public offering (IPO) in 2019, as of today, neither of these companies is public.
With the emergence of new disruptive companies such as Uber and Lyft, there has also been a shift in how markets such as ride-sharing have changed the established relationship of employer/employee. The growth and success of ride-sharing companies such as Uber and Lyft have created a new economy, the gig economy.
The gig economy is based on employees of firms such as Uber and Lyft working as an independent freelancer or contractor, never being hired as an employee of the company. According to a study done by Intuit (1), by 2020 as much as 40% of the American workforce could be independent contractors. The introduction of the gig economy offers other companies the opportunity to create businesses which may “bolt-on” to new disruptive trends such as ride-sharing.
HyreCar (NASDAQ: HYRE) is one of the first “bolt-on” companies to complete an IPO, providing investors an opportunity to purchase exposure to economic disruption within ride-sharing markets and the gig economy.
HyreCar is a car-sharing marketplace serving employees of the ride-sharing economy which allows owners and car companies (rental, national auto, and OEMs) to rent their idle assets securely and safely. HyreCar is active currently in 34 states, and Washington D.C. with expectations for further multi-city expansion. HyreCar works with leading companies such as Uber, Lyft, Caviar, Postmates, DoorDash, and others. According to HyreCar, the company is the only vehicle rental provider serving ride-sharing drivers with a footprint across the United States. Noted in HyreCar’s investor presentation, there are as many as 40% of ride-sharing drivers who apply to a ride-sharing service but don’t own a qualifying vehicle. Using HyreCar, owners can post idle vehicles to the HyreCar marketplace, allowing drivers to view available inventory. After selecting a car from the marketplace, drivers create a profile, provide pertinent personal information, and submit a credit or debit card for payment. HyreCar does DMV and criminal checks of all participating drivers.
HyreCar generates revenues by charging drivers a percentage of their earnings and providing daily direct insurance as part of the rental cost. According to HyreCar, the average weekly rental is about ~$200, drivers pay $91 in direct insurance and a ten percent fee. This equals an estimated gross billing of ~$311/driver/week. The net revenue received from gross billings by HyreCar equals ~$141 with gross profit margins expected to be 45-50%. Of the estimated greater than 4.5m estimated Uber and Lyft drivers by 2023, HyreCar believes it can achieve market share of 13% which would equal a potential 2023 revenue opportunity of greater than $1 billion, assuming the average driver worked 13 weeks per year. We believe the company’s estimate is overly optimistic, so if we were to assume only 2% share of the estimated 2023 ride-sharing drivers, the company’s revenue opportunity could equal greater than $165 million.
As of the company’s second quarter of 2018, average daily active rentals reached 1,068, up 158% year-over-year, while gross billings have climbed to $5.2 million equaling year-over-year growth of 174%. The company has estimated net revenues of ~$10 million for 2018, with ~$6m in revenues YTD, suggesting continued revenue acceleration during the second half of 2018. For 2017 the company generated $3.2 million in revenues. At the end of the second quarter the company had $11.9 million in cash due to contribution from the company’s June 29th, 2018 IPO offered at $5/share. During its second quarter earnings call, the company’s management stated it believed there was a pathway to cash flow profitability by mid-2019. HyreCar management currently owns ~33% of shares outstanding, with the company’s CEO and Chief Development officer recently purchasing 15,000 shares at an average price of ~$3.15.
HyreCar has become the #1 independent activator of Lyft drivers in the U.S. per the company, with growth of 10x since beginning the program last year in May (HyreCar Lyft Registration). We believe this potentially suggests that HyreCar could become a valuable “bolt-on” asset to one of the ride-sharing leaders, especially Lyft given its participation in recruiting new drivers for the company’s ride-sharing platform.
Given its significant top-line growth, we believe shares of HyreCar could trade at a forward price-to-sales multiple of 3-5x. Based on current guidance for 2018 that would assume a market capitalization of ~$30-50 million versus the company’s current capitalization of ~$38m. If the company grew revenues at half of the current estimated levels for 2018 during 2019, revenues could reach ~$20 million. Utilizing the same price-to-sales multiple could generate a market capitalization of $60-100 million. If the company were to simply trade back to its IPO offer price of $5 per share, it would offer upside of ~53% from Thursday’s closing price of $3.26.
On a technical basis, shares of HyreCar have recently broken out of the recent downward wedge formation. We believe initial resistance from the recent breakout could be in the $3.60-3.70 area. If shares move through this resistance, the next major resistance level may be ~$4 in our opinion, with upside to $5+ if shares move beyond these levels. The shares recently set new lows in the $2.50 range, which is likely near-term support for shares.
We believe HyreCar has created a unique offering which “bolts on” to the larger ecosystem created by the economic disruption of large global leaders such as Uber and Lyft. However, given its small market capitalization and only four years of operations, shares are not without risk. It’s audited financial statements for 2016 and 2017 were prepared with a going concern commentary from the company’s auditors. The company is extremely dependent on both Uber and Lyft remaining as market leaders in the growing ride-sharing market here in the U.S. While larger players such as Uber and Lyft could look to “bolt-on” HyreCar, they could also create their own internal network which may directly compete with the company’s business model. Other disruptive companies such as Turo, which provides users a community of car owners who rent for leisure, may look at HyreCar’s rental ride-sharing model as a potential extension of their current market. While the company is a leader in driver referrals for Lyft, currently there is no formal written contract with either Uber or Lyft.
Other risks include potential dilution as warrants issued with the conversion of debt and IPO may potentially add another ~1m shares to the current outstanding share count of ~5.5 million. To a lesser extent, risks exist due to seasonal business trends in the company’s revenues with the first three months of the year traditionally seeing slower demand.
Given its exposure to the rapidly growing ride-sharing market and gig-based economy, we believe shares of HyreCar offer investors an opportunity to participate in the future growth of these end markets. We believe HyreCar could achieve significantly higher valuation through operating execution, or the potential for acquisition by one of the larger company’s whose ecosystem currently benefits from its operating model. Investors who want to get their “gig on” may want to look at shares of HyreCar to participate directly in new disruptive growth markets.
Disclosure: Grinder Capital is not recommending investors buy/sell shares of HyreCar (NASDAQ: HYRE). Investing involves risks and investors should determine if HyreCar may fit their individual investment strategies. Both Grinder Capital and Mr. Schreiner own shares of HyreCar at the time of publishing.
1 - Intuit 2020 Report “Twenty Trends That Will Shape the Next Decade, 2010. https://http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/intuit_2020_report.pdf
HyreCar Investor Presentation, August 2018. https://ir.hyrecar.com/wp-content/uploads/sites/2/2018/08/HyreCar-Investor-Presentation-September-2018.pdf