What a brutal six months it’s been for ACV Auctions. The stock has dropped 29.3% and now trades at $16.38, rattling many shareholders. This might have investors contemplating their next move.

Is now the time to buy ACV Auctions, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is ACV Auctions Not Exciting?

Despite the more favorable entry price, we're cautious about ACV Auctions. Here are three reasons why we avoid ACVA and a stock we'd rather own.

1. Low Gross Margin Reveals Weak Structural Profitability

For online marketplaces like ACV Auctions, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification.

ACV Auctions’s unit economics are far below other consumer internet companies, signaling it operates in a competitive market and must pay many third parties a slice of its sales to distribute its products and services. As you can see below, it averaged a 25.1% gross margin over the last two years. That means ACV Auctions paid its providers a lot of money ($74.88 for every $100 in revenue) to run its business.

2. Poor Marketing Efficiency Drains Profits

Consumer internet businesses like ACV Auctions grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It’s very expensive for ACV Auctions to acquire new users as the company has spent 60.6% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between ACV Auctions and its peers.

3. Breakeven Free Cash Flow Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

ACV Auctions broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Final Judgment

ACV Auctions’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 30.6× forward EV/EBITDA (or $16.38 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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