The Dark Side Of HyreCar – HyreCar Inc. (NASDAQ:HYRE)

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HyreCar (HYRE) is one of those companies where we shoot before we aim. At first glance, everything seems fine, but as we looked deeper, there are some red flags that are quite concerning. We are still holding on to our shares, but in light of these red flags, along with the fact that management hasn’t responded to our email, we are reluctant to add more shares, even at lower prices.

To recap: What we liked

The one thing that attracted us to HyreCar was the promise of massive demand from the consumer side. Management has claimed multiple times that driver demand far outstripped supply, and backed this up with their “80000 driver leads per quarter” statistic. If this statement was true, it meant growth should be easy, as all management had to do was to focus on the supply side to drive growth. Now, there were other aspects that we liked, like the platform business model and the high insider ownership, but growth is the main reason we own HyreCar.

The problem

The financials, however, don’t reflect this “demand”. Gross billings were pretty much flat from Q1-Q2, which is alarming considering this is the first time gross billings growth had slowed sequentially. Before this slowdown, gross billings were growing double digits QOQ, so it is really alarming to see a slowdown of this magnitude.

Source: 10-Q, WY Capital

The main reason why the slowdown is so odd is that supply has increased substantially from Q2. According to management’s own words, this supply increase should lead to significant revenue growth.

Building car capacity and scaling dealer relationships were the main themes of our dealer initiative in Q2. In our 2019 first quarter call, we noted 114 commercial accounts representing approximately 1,700 cars listed on the platform. I’m happy to report that today, we have increased commercial account by 50% to 170, representing approximately 2,300 cars listed.

While these cars represent future revenue growth, obviously, there’s still a major asymmetry between the driver leads we’re generating and the cars listed on our site.

Q2 2019 call

We looked for seasonal explanations in both HyreCar’s and Uber’s (NYSE:UBER) filings, and while there was no explanation in HyreCar’s filings, this appeared in Uber’s filings:

For Ridesharing, we typically generate higher revenue in our fourth quarter compared to other quarters due in part to fourth quarter holiday and business demand, and typically generate lower revenue in our third quarter compared to other quarters due in part to less usage of our platform during peak vacation season in certain cities, such as Paris. We have typically experienced lower quarter-over-quarter growth in Ridesharing in the first quarter.

Uber S-1 filing

There is no explanation for a slowdown in business in the second quarter. We’ve looked through HyreCar’s 10-Q and earnings call for explanations, but there was little explanation on why gross billings growth had slowed.

Source: similarweb

We’ve also looked at web traffic, and there was a noticeable decline in April from March. Of course, this isn’t enough evidence to be conclusive, but it could be a sign of some seasonality.

There are other possible explanations for this. Perhaps HyreCar had slowed down marketing due to its low cash supply. If this were the case, then the capital raise at the end of Q2 should once again help drive growth. Management did mention after all that the raise should help supercharge all facets of the business.

The proceeds from this raise allow us to supercharge all facets of the business with a focus on technology. So we are enhancing the dealer portal, including building out a standardized driver earn-to-own program, which was a specific ask from one of our OEM partners as well as accelerating back-end infrastructure development by adding senior engineering talent.

Q2 2019 call

Source: 10-Q, WY Capital

Revenue growth QOQ has also slowed down drastically, falling below 10% for the first time in HyreCar’s history. Although it was still positive, the only reason for this is the fact that net revenue margin improved due to HyreCar offering multiple revenue share tiers.

Revenue growth in the second quarter was primarily driven by the higher take rate or net revenue margin associated with the two new service tiers we rolled out during the second quarter as well as net rental days increasing to a new high of approximately 140 days for the second quarter.

Q2 2019 earnings call

By the way, the “new high” is quite misleading since net rental days only increased 2000, or around 1.5%, from Q1 to Q2. (Management seems to have made a mistake by saying 140 days instead of 140,000 days in the call. In the Q1 2019 call, they had mentioned rental days were 138,000.)

Source: WY Capital, earnings calls

Again, it’s definitely odd why KPIs on the driver side have stopped growing. Net drivers added actually declined QOQ from 2,900 to 2,837. Management seems focused on the supply side, but perhaps they need to take a look at the demand side too.

We will be looking at Q3 numbers very closely to track whether the capital raise will help growth. If billings continue to be flat in Q3 and management doesn’t provide an explanation, well, it may be time to sell our shares.

Competition is increasing

Another problem we have found through due diligence is that HyreCar is seeing increasing competition from the partners of ridesharing companies Uber and Lyft (NASDAQ:LYFT). Ridesharing companies like Uber and Lyft partner with rental companies like Hertz (NYSE:HTZ) to rent cars to drivers. These agreements seem to be exclusive, from what we’ve learned – drivers may not be able to drive for a rival platform and there are other restrictions.

Management, at one point, had mentioned that HyreCar was “the top search result when searching for “rent a car for Uber or Lyft”. Although HyreCar has a better product which gives more flexibility to drivers, the top search results show partners featured on Uber’s website, not HyreCar, nowadays. This reduces the credibility and visibility of HyreCar within the search results. Drivers, especially less knowledgeable ones, may pick the “official” Uber partners instead of the unknown third-party rental service at the bottom of the search results, especially with ominous warnings like this.

Source: Google search

Management has mentioned that HyreCar intends to be an official Uber or Lyft partner at some point, but it’s not sure when this day will come.

Valuation

With slowing growth, even the 2 P/S ratio, which is incredibly low for a business model like HyreCar, begins to look more expensive. There is just too much uncertainty currently surrounding the slowing growth, so we cannot do a proper valuation until we have more information. Until Q3 results come out or until management answers our questions satisfactorily, we’ll not buy shares at any price, regardless of how far the stock falls.

Takeaway

Nobody likes to admit when they’re wrong, but, in this case, we were wrong to buy without doing some due diligence. There clearly are some serious red flags with this company, especially regarding the slowing growth, and we’ll wait a few more quarters to see what management has to say before making any buy or sell decision.

Disclosure: I am/we are long HYRE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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