After a little over a year in my portfolio, the time has come to get rid of automotive classifieds company iCar Asia Ltd (ASX: ICQ). Why?
The company has persistently failed to deliver on its investment promise. Take a look at this chart:
This is a chart of iCar’s quarterly revenues and cash outflows going back to March 2014. I have excluded capital raisings, fees associated with capital raisings, and the acquisition of businesses in order to more accurately reflect the operational performance of iCar.
Unfortunately, the company has failed to live up to its promise as a worthwhile place to invest. We can see that after two and a half years of heavy cash outflows, the company has managed to approximately triple its quarterly revenues.
While that doesn’t sound like a bad result, it belies the multiple millions in cash that have been shovelled into the company furnace over that time. iCar has raised capital from shareholders four times since March 2014, which must be close to some kind of ASX record.
With revenues having turned down again across the last two quarters and the company’s cash outflows rising, I simply haven’t got any confidence that the company can make its way to profitability in a reasonable time frame.
Management has previously stated that they intend to hit operational break-even point in 2018, but who knows? Unfortunately iCar shares have fallen so heavily that they would need to triple from today’s levels just to get me back to the price at which I bought it at. Combined with its poor operational performance, I just don’t think the company can deliver.
Carsales.Com to the rescue?
Some readers will be aware that Carsales.Com Ltd (ASX: CAR) is a significant shareholder in iCar, and the possibility of a takeover shouldn’t be overlooked. However, from my perspective, Carsales should be in no rush to buy out iCar.
Carsales already owns ~20% of iCar and already has significant exposure to the ups and downs of that investment. If iCar proves to be a bomb, as is looking the case so far, Carsales will face losses. Yet if iCar turns things around, it has a long growth runway ahead of it, and Carsales can buy it later when the future is brighter. It will have to pay more, but arguably the risk-reward trade-off will be better then as well.
Note that iCar Asia could well go on to be successful, and it operates in attractive markets. It also has cash equivalent to around 40% of its current market cap, which is pretty good. Australian Foundation Investment Co. Ltd. (ASX: AFI) certainly seems to think so, as it recently took a 7% stake in iCar. Like they say, there’s two sides to every trade.
I’ve written previously about the risks of owning tech stocks with limited revenues and persistently heavy cash outflows – I should have followed my own advice. However for now, it’s sayonara iCar Asia.
(For full disclosure I still hold my shares in iCar, but intend to sell in the next few weeks, when Foolish trading rules permit).
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Motley Fool contributor Sean O'Neill owns shares of iCarAsia Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.