Driving Forward: The Hertz-Amazon Partnership Reshapes the Used Car Market
Market Excitement Ignited by Hertz-Amazon Alliance
The recent announcement of a partnership between Hertz Global and Amazon has generated considerable buzz among investors. This collaboration, which sees Hertz listing its pre-owned vehicles on Amazon's dedicated automotive website, spurred a remarkable 12.5% increase in Hertz's share price between August 19 and August 27, rising from $5.20 to $5.85. This surge reflects a strong belief in the potential positive impact of this deal on Hertz's business trajectory.
Unpacking the Details of the Groundbreaking Agreement
Under this innovative agreement, Hertz will offer its fleet of used vehicles for sale directly through the Amazon Autos platform. Currently, this initiative is in a trial phase, confined to the metropolitan regions of Dallas, Houston, Los Angeles, and Seattle. Potential car buyers in these areas can conveniently browse and select used vehicles online. Upon completing a purchase, customers can collect their new vehicles from designated Hertz locations, streamlining the acquisition process. For Amazon Autos, which was launched less than a year ago, this partnership is a significant boon, substantially broadening its vehicle offerings and brand diversity, which were previously limited.
Strategic Advantages for Hertz in the New Collaboration
The primary advantage for Hertz lies in the expanded reach and enhanced convenience this partnership offers to used car buyers. By leveraging Amazon's vast online marketplace, Hertz stands to significantly increase its volume of used car sales. Traditionally, Hertz has sold its rental fleet through its company-operated retail outlets in the U.S., a process that also generated revenue from ancillary services like warranties and financing. While the exact number of used vehicles Hertz sells annually remains ambiguous, the company has indicated sales in the thousands. This digital expansion through Amazon provides an opportunity to scale its used car business substantially. Furthermore, this move aligns perfectly with CEO Gil West's vision of broadening Hertz's retail presence and elevating the brand recognition of its used car offerings, signifying a crucial step towards revenue diversification.
Evaluating Hertz's Stock: A Long-Term Perspective
Hertz's business operations are segmented into Americas RAC and international RAC, both focusing on vehicle rentals and associated services such as insurance and satellite radio. The core rental business of Hertz has recently faced headwinds, experiencing declining sales and profitability. In the second quarter, total revenue saw a 7% dip to $2.2 billion, with the company reporting a loss of $104 million after certain adjustments. Despite these challenges in its primary sector, the company's valuation, particularly its price-to-sales (P/S) ratio, suggests considerable potential for upside if the Amazon partnership proves successful. While Hertz currently operates at a loss, making the traditional price-to-earnings (P/E) ratio less applicable, its P/S ratio stands at a low 0.2, significantly below the Russell 2000 index's P/S ratio of over 1, even after a 74% increase in share price over the past year. However, given that the deal with Amazon is still in a pilot phase, long-term investors are advised to exercise caution and monitor the test market results before making significant investment decisions. The decision by Amazon and Hertz to expand this program beyond the current test markets will serve as a key indicator of its long-term viability and success.