The rise of automotive e-commerce is not limited to the US as it is based in the UK Cazoo (CZOO -1.43%) aims to transform the European car buying and selling experience. However, the same issues that beset the US in 2022, such as concerns about high inflation and recession, have no doubt also induced anxiety in the European car-buying demographic.
Given these challenges, Cazoo’s quest to capture an addressable European used car market worth more than £100 billion has been much easier said than done. Cazoo’s difficulty turning a profit seems to be reflected in its share price, which has fallen into penny stock territory over the past year.
However, even troubled stocks are capable of large rallies under the right conditions. So the persistent downtrend in Cazoo stock was broken for at least one spectacular day, but cautious investors should consider the entirety of the available data before taking a ride on Cazoo now.
Bulls have their day
The weeks leading up to Cazoo’s Q2 2022 financial results were mostly business as usual, meaning the share price continued on its downward trajectory. Still, there were a couple of notable events along the way. First, Cazoo announced its business restructuring plan, which emphasized downsizing, including a downsizing (a common reason in 2022), less spending on brand marketing, and a vague “delay of a series of planned investment projects”. Then, following the company’s acquisition of Brumbrum and previous launches in Germany, France and Spain, Cazoo launched in Italy at the end of June.
So one could argue that Cazoo is growing, at least in a literal, geographic sense. However, whether Cazoo’s cut-back-but-outbound-growth strategy will translate into better bottom-line results is an entirely different story.
These factors were certainly on the minds of investors as Cazoo prepared to release its fiscal second quarter 2022 results on the morning of August 2. However, few traders could have expected the 118% move in the share price that day, along with the 139 million. -Share the single-session trading volume in a stock that typically sees less than 3 million shares traded daily.
Mind the bottom line
It’s not hard to identify the data points that traders likely focused on. In the second quarter of 2022, Cazoo’s revenue soared 145% year-on-year to £333m, a quarterly record for the company. In addition, the company’s quarterly vehicle sales increased 124% to 23,955. CEO Alex Chesterman was quick to point to Cazoo’s strong revenue growth, achieved “despite a tough macroeconomic environment.”
That’s not the whole story of Cazoo’s second quarter, though. Year over year, the company’s gross margin shrank from 5.6% to a paltry 0.5%. In addition, Cazoo’s loss of earnings widened considerably, from £102m in the first half of 2021 to £243m in the first half of 2022.
These wildly mixed results cast doubt on Cazoo’s claim that the company has “successfully implemented” its “realignment plan to resize the business and position us for profitable growth.” There is growth in some aspects, but whether it will be profitable remains to be seen.
It’s not inconceivable, then, that a combination of top-line obsession and massive shorting pushed Cazoo stock above $1 on earnings day. It’s not a terrible idea for potential long-term investors to wait on the sidelines for a while and see if future updates confirm Cazoo’s “profitable growth” claim.
David Model has no position in any of the aforementioned stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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