As we look ahead to 2023, RumbleOn, Inc. (NASDAQ: RMBL) is gearing up for some exciting changes that are set to enhance both customer experience and the company’s Free Cash Flow (FCF) growth. In my perspective, these developments hold the potential to not only expedite transaction closings but also have a positive impact on net sales growth.

RumbleOn in a Nutshell
RumbleOn is at the forefront of transforming the powersports industry through its technology-based platform. With its headquarters nestled in the Dallas Metroplex, it proudly claims the distinction of being the first and largest platform of its kind to go public in the United States.

The company’s mission is clear: to make powersports vehicles accessible to a wider audience across the nation. By offering a diverse selection, great value, transparency, and a seamless transaction experience, RumbleOn aims to provide an unrivaled experience within the industry.

Impressive Growth in Revenue and FCF Prospects
The recent quarterly results serve as a testament to RumbleOn’s promising trajectory. In the three months ending June 30, 2023, the company recorded the sale of 20,000 powersports units, representing a nearly 17.7% increase compared to the previous quarter ending March 31, 2023. Additionally, quarterly revenue surged by close to 15%, reaching approximately $368 million.

One noteworthy aspect is the shift from negative net income in previous years to analysts now anticipating positive figures for 2024 and 2025. In my view, the prospect of positive earnings per share (EPS) and growing FCF could attract a broader pool of investors, potentially driving the stock price upwards.

Market analysts are eyeing 2025 net sales at around $1.801 billion, with EBITDA and EBIT expected to reach approximately $97 million and $68 million, respectively. Net income for 2025 is projected to be around -$6 million, while FCF is poised to grow significantly, exceeding 2024 levels.

A Rock-Solid Balance Sheet
RumbleOn’s latest quarterly report reveals an increase in assets compared to the previous year. While cash on hand remained steady, the company reported upticks in goodwill, inventory, intangible assets, and right-of-use assets.

As of June 30, 2023, RumbleOn boasted $44 million in cash, $12 million in restricted cash, and nearly $37 million in accounts receivable. With approximately $325 million in inventory, $7 million in prepaid expenses and other current assets, the total current assets summed up to $452 million, with a current ratio above one, signifying solid liquidity.

Furthermore, with property and equipment valued at $81 million and right-of-use assets amounting to roughly $170 million, alongside goodwill and intangible assets at $23 million and $242 million, respectively, the company’s total assets reached $1.036 billion, exceeding the total amount of current assets by more than 1x. This robust balance sheet positions RumbleOn favorably.

Examining the liabilities, accounts payable and other current liabilities stood at $84 million, with a vehicle floor plan note payable of $246 million and a current portion of long-term debt and line of credit amounting to $18 million. Additionally, the company reported a senior secured note worth $322 million, convertible debt of approximately $33 million, operating lease liabilities of around $138 million, resulting in total liabilities of $854 million.

Given the sum of senior secured notes, convertible debt, and lines of credit, it’s understandable that some investors might express concerns about the overall debt load. Assuming a forward EBITDA of $83 million, the net debt/EBITDA ratio appears to exceed 3x. In my opinion, a reduction in debt or continued FCF growth could contribute to an improved stock valuation.

FCF Catalysts: Shorter Sales Times, Brand Building, and Direct Response Channels
RumbleOn employs both retail and wholesale sales channels to maximize profitability by increasing sales volume and shortening sales cycles. Additionally, the company is focusing on boosting used vehicle sales through brand building strategies and direct response channels. It’s worth noting that pricing strategies and economies of scale might further bolster FCF margins in the future.

A Lucrative Market Opportunity
RumbleOn’s ambitions extend to the vast powersports market, which, according to management estimates, could be valued at nearly $100 billion. Considering current net sales and the potential for growth, there appears to be substantial room for improvement. A passage from the last annual report underscores the market’s expansive potential:

“Powersports includes motorcycles, side-by-sides, ATV, UTV, snowmobile, and personal watercraft along with related parts and components. If you add in the largely unaccounted for but significant peer-to-peer market in used powersports, which RumbleOn believes represents up to 70% of used powersports transactions, the total addressable powersports market is likely in excess of $100 billion.”

Further Inventory Optimization, Data Utilization, and New Retail Locations
In my perspective, the addition of new franchises to RumbleOn’s list of retail locations, coupled with the acquisition of high-quality used vehicles, may lead to additional net sales growth. The company’s use of data analysis is also promising in terms of efficiency gains. In its recent quarterly report, management highlighted its efforts in data analysis and the Omnichannel platform:

“RumbleOn leverages technology and data to streamline operations, improve profitability, and drive lifetime engagements with our customers by offering a best-in-class customer experience with unmatched Omnichannel capabilities. Our Omnichannel platform offers consumers the fastest, easiest, and most transparent transactions available in powersports.”

The Anticipated New Corporate Website for 2023
Management has announced plans to unveil a new corporate website in 2023, complete with innovative features. In my view, this could result in improved user access to inventory, potentially leading to an uptick in transactions. Consequently, this may contribute to larger net sales growth and FCF growth.

According to the company:

“With this goal in mind, we intend to launch our new corporate website under the RumbleOn brand during the first half of 2023 and our all-new RideNow-branded website later in the second quarter of 2023. Our RideNow website will have unmatched features for our customers, allowing them to see all inventory in one place and it will have the ability to push inventory to individual dealer websites, resulting in a better online presence and customer experience.”

Cash Flow Expectations
Taking into account the previously mentioned assumptions and historical financial data, my financial model estimates 2023 net income to be close to $49 million, with depreciation and amortization at approximately $109.55 million, amortization of debt discount at $28.5 million, and stock-based compensation expense at about $9.55 million. Additionally, I’ve included deferred taxes at roughly -$151 million but no origination of loan receivables.

When factoring in changes in operating assets and liabilities, I anticipate changes in 2023 accounts receivable worth $178 million, changes in inventory around -$260 million, and changes in accounts payable and accrued liabilities worth $30 million. Finally, with changes in floor plan trade note borrowings of about $105 million, the net cash used in operating activities is projected to be close to $147 million. Adding the purchase of property and equipment of approximately -$6 million, the estimated 2023 FCF stands at $142 million

Considering a terminal EV/FCF multiple close to 8.55x and a cost of capital of 7.055%, the implied Net Present Value (NPV) of future FCFs comes to $706 million. Taking into account cash of about $44 million and restricted cash of approximately $12 million, and subtracting the current portion of long-term debt and line of credit worth $18 million, vehicle floor plan note payable close to $246 million, senior secured notes of $322 million, and convertible debt worth $33 million, the equity figure lands at $142 million. The implied fair price is estimated to be around $8.55, with a forecasted internal rate of return of 3.455%. Based on this analysis, I believe this represents a favorable opportunity for conservative investors, although it may not be the ideal choice for those seeking higher IRR in the range of 4%-5%.

Competition and RumbleOn’s Competitive Edge
In my assessment, RumbleOn faces competition from traditional franchised dealerships, independent used vehicle dealers, online and mobile sales platforms, as well as private sellers. Competition primarily centers around delivering an exceptional customer experience, maintaining quality inventory, offering a wide product selection, and pricing competitively. RumbleOn distinguishes itself by providing a comprehensive platform that empowers customers to enjoy a seamless shopping experience online, in-store, or through its mobile app. Its user-friendly purchasing process and extensive range of available models give it an edge in sourcing and sales.

Risk Considerations
It’s essential to acknowledge certain risks associated with RumbleOn. The company has significantly increased its indebtedness following the RideNow and Freedom transactions. This heightened leverage reduces flexibility in responding to changes in business and economic conditions, potentially increasing interest expenses. Elevated debt levels can also limit the funds available for working capital and other corporate purposes, potentially placing the company at a competitive disadvantage.

Moreover, the company faces variable interest rate risk on its floor plan payables and other debt instruments, which could negatively impact profitability. The powersports industry is sensitive to general economic fluctuations and other factors that may influence the demand for products and services, potentially having an adverse impact on the company’s business and financial results. Factors such as inflation, changes in fuel prices, and interest rates can also exert influence. Increases in labor costs and other expenses have been a concern. Additionally, investors may be apprehensive about recent stock warrants, which could lead to equity dilution and declines in stock prices.

In Conclusion
RumbleOn emerges as a company with a robust business model and a strategic focus on delivering an exceptional customer experience in the powersports sector. The impending launch of the new corporate website and the strategic utilization of data hold the promise of enhanced efficiency and improved FCF margins. While I believe RumbleOn’s stock could trade at higher levels, it’s crucial to remain mindful of the financial risks that could affect future performance. Investors should carefully evaluate the company’s future net debt/EBITDA levels before making investment decisions.