Contributor, Benzinga
September 7, 2021
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Though negotiating car prices can often net you a better deal, it’s an uncomfortable proposition for most. The harsh truth is that the moment you walk in through a dealership’s doorway, you’re at a disadvantage. According to a report from The Wall Street Journal, the average age of vehicles on U.S. roadways increased to a record 12.1 years.

In other words, you’re dabbling in a language that the salesperson is fluent in. Filling growing demand for convenient, online automotive transactions, the Cazoo initial public offering (IPO) shows great promise but also features risks that prospective buyers should consider.

When was the Cazoo IPO Date?

Unlike a traditional IPO, Cazoo will go public via a merger with a special purpose acquisition company (SPAC) called Ajax I (NYSE: AJAX). Officially, Cazoo has a date on the IPO calendar of Aug. 27, 2021.

SPACs, also known as blank-check firms or shell companies, have no underlying business of their own. Instead, their sponsors begin an IPO for the sole purpose of identifying a merger target, usually within a two-year time window. After the sponsors find a private enterprise, the SPAC’s shareholders vote for whether the deal should move forward or not. If approved, a business combination occurs, with the SPAC assuming the identity of the target enterprise, while the latter becomes a publicly traded company by default.

In this particular case, Ajax I announced in late October 2020 that it will offer 75 million shares in its IPO at a price of $10 per each unit. Thanks in large part to billionaire co-founder Daniel Och’s tremendous pull, Ajax received massive interest despite well before the SPAC identified Cazoo as a merger target. Goldman Sachs (NYSE: GS), Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) acted as joint bookrunning managers for the offering.

In late March of this year, Cazoo announced that it would combine with Ajax, a deal that assigned a $7 billion valuation to Cazoo, which specializes in selling used cars online in the British market. Seeking to become the Amazon (NASDAQ: AMZN) of vehicle sales, Cazoo’s business model is similar to U.S.-based counterparts Carvana (NYSE: CVNA) and Vroom (NASDAQ: VRM).

On Aug. 18, Ajax I shareholders voted to approve the business combination with Cazoo. Starting from Aug. 27, the online auto retailer’s Class A ordinary shares and warrants will trade on the New York Stock Exchange under the ticker symbols CZOO and CZOO WS, respectively.

Cazoo Financial History

While a public market debut is always fraught with uncertainty, Cazoo enters the ring at an intriguing time. Prior to the pandemic, the concept of online car sales resonated strongly with younger buyers. According to consumer surveys conducted in 2016, “87% of American adults dislike something about the process of purchasing a vehicle at a traditional car dealership.”

Moreover, approximately 61% of U.S. consumers felt like they were “taken advantage of at least some of the time when shopping at a car dealership.” Also significant is that “52% of Americans feel anxious or uncomfortable when visiting a car dealership.” On a comical but understanding note, 56% of millennials reported that “they'd prefer to clean their homes than negotiate with a car dealer.”

While Americans’ hesitancy toward haggling is a relatively known commodity, it turns out that British consumers also share similar apprehensions. Therefore, Cazoo was already tied to a relevant business irrespective of the impact of the COVID-19 pandemic. But certainly, the global health crisis ramped up the underlying financial prospects of CZOO stock.

In June 2020, the WSJ reported that the pandemic pushed car buying online and more importantly, auto industry experts predicted that the trend would stick. Due to lingering fears of COVID-19 infections at the time, contactless services represented a top priority for many consumers across the world. Not surprisingly, then, in early October 2020, Techcrunch.com revealed that Cazoo raised $311 million in a private equity round. And that tally came only 6 months after the firm raised $116 million from venture capitalists.

To further encourage would-be speculators of CZOO stock, both Ajax I and Cazoo disclosed its results for the second quarter of 2021, with the biggest highlight being that vehicles sold measured 10,692 units, up a staggering 429% from the year-ago quarter. Also, revenue increased 605% to 141 million GBP (approximately $193.7 million USD at the current exchange rate).

Cazoo Potential

Beyond the tremendous growth that Cazoo exhibited in Q2, management seeks to build off the traction and expand into other markets. From its corporate statement, Cazoo began “buying and reconditioning cars” in Germany and France ahead of its launch into mainland Europe, which will begin later this year.

Further, European car sales have picked up in earnest this year relative to last. According to data compiled by Statista.com, passenger car sales in Europe hit 1.28 million units in June, up 13.3% from the same month in 2020. In May, European car sales hit nearly 1.1 million units, which was up almost 74% year-over-year. Therefore, consumer sentiment is rising just as Cazoo is about to enter the public market under its own corporate identity.

You can find additional evidence of the company’s potential through U.S. counterpart and competitor Carvana’s financial performance. Over the last several years, Carvana delighted its stakeholders with a rapid buildout of its top-line sales. However, profitability has always been a concern, with the company printing red ink on an annual basis since at least 2014. However, in its Q2 2021 disclosure, Carvana posted not only blistering revenue of $3.3 billion but also positive net income of $22 million.

At the same time, the car business is an extremely competitive one. For example, Carvana rival Vroom is still posting widening net losses, which is a warning to Cazoo buyers about overexuberance. As well, it’s not 100% clear how long people will be fearful about the pandemic, which may lead them to go back to the dealerships for superior pricing.

How to Buy Cazoo IPO (CZOO) Stock

Though an exciting proposition, traditional IPOs have frustrated retail investors as they usually find themselves locked out of buying shares at their initial offering price. Instead, underwriters of entities seeking to go public distribute new issues almost exclusively to institutional investors, a process known as a primary market transaction.

For most folks, participating in a bread-and-butter IPO requires purchasing shares at the open, a secondary market transaction. The allure of SPACs, though, is that anyone can participate in every phase of the process, ranging from pre-merger announcement to post-shareholder approval. More importantly, SPACs offer a road to the capital market for enterprises that normally wouldn’t qualify for a traditional public debut.

Finally, SPACs trade like normal equity units. If you already know how to buy stocks, you can participate right away. If not, just follow the steps below.

Step 1: Pick a brokerage.

No longer an exclusive arena for the well-heeled, the advent of competition and mobile technologies have made online brokerages accessible to everyone. With platform cost no longer being a primary divisor, you should narrow your choice of best brokers to what ideally suits your lifestyle.

Step 2: Decide how many shares you want.

No matter how careful you are with your due diligence, IPOs are usually volatile and unpredictable because of their lack of a track record. Therefore, pick a balanced share count to afford you adequate rewards but also mitigates downside risks.

Step 3: Choose your order type.

Before wagering, familiarize yourself with these market concepts.

  • Bid: The maximum price a buyer will offer, the bid is always lower than the ask.
  • Ask: The minimum price a seller will take, the ask is always higher than the bid.
  • Spread: Principally the difference between the bid and ask price, the spread also denotes market liquidity and risk. Narrower spreads indicate higher liquidity and lower risk due to strong trader involvement, while wider spreads imply lower liquidity and higher risk.
  • Limit order: To buy (or sell) stocks at a particular price, choose limit orders, which provide transparency but no execution guarantees.
  • Market order: Conversely, you can guarantee fulfillment through market orders but only at the prevailing rate, which may change substantially during order processing.
  • Stop-loss order: A defensive protocol for your portfolio, a stop-loss order automatically exits your position at either a predetermined price or anything lower.
  • Stop-limit order: Stop-limit orders only execute at a predetermined price, providing full control in your automated exits. However, such orders carry the same non-fulfillment risk as limit orders.

Step 4: Execute your trade.

To execute a market order, follow these steps:

  1. Select your action type (buy or sell).
  2. Enter the shares you want to acquire (or sell).
  3. Hit the Buy (or Sell) button.

Follow the same sequence for limit orders (but include your execution price).

An IPO for the New Normal

Originally catering to the apprehension that most people feel regarding haggling over car prices, Cazoo’s business absorbed a higher demand profile due to pandemic-related fears. This dynamic has led to remarkable growth although prospective investors must consider how long such anxieties will last.

About Joshua Enomoto

His distinct writing style of distilling convoluted data into relatable and compelling narratives has earned him recognition among several investment-related publications.