In Tuesday's earnings call, Avis Budget Group (NASDAQ: CAR) announced that both earnings and revenues surpassed consensus estimates as favorable macro conditions boost profits.
Adjusted earnings of $10.74 per share beat consensus analyst estimates by 55.7% and Q3 2020 by over 100%. Meanwhile, total revenues of $3 billion surpassed the consensus estimate by 7.4%, an improvement of 96% year-over-year.
A jump in revenues per day, along with an increase in rental days helped it get there.
Adjusted EBITDA reached over $1 billion, the best quarterly Adjusted EBITDA in Avis Budget Group’s 75-year history.
Avis continued to grow its fleet size in Q3 substantially and has strong relationships with its suppliers. It has spent around $8 billion on new cars this year and believes it will continue in the same vein going forward.
But how did we get here and can the company continue to grow at their current rate?
Why has Avis stock surged?
This year, Avis Budget Group stock has been up by over 900% and now sports a $23 billion market cap, at the time of writing.
Furthermore, this week’s staggering share price rise saw trading volume rise 3x higher than the prior 30-day average.
Rental-car stocks have a volatile history but can coast along for long periods. It wasn't too long ago that Avis was a casualty of the 2009 housing crisis, and the company's share price fell from $13 down to just 39 cents during this time.
Is Avis's price surge sustainable?
Largely considered a dull sector, the rental-car industry has been enjoying an optimistic glow in recent weeks. However, it sports very few participants. Avis, Hertz (OTCMKTS: HTZZ) and Enterprise (a private company) control over 90% of the U.S. rental-car market.
Macro events have boosted the rental-car market. Indeed, the pandemic has led to a surge in used-car prices and an uptick in rental-car pricing.
At the moment, semiconductor shortages and supply chain issues mean new-car shortages are projected to continue into 2022, which presents an optimistic outlook for continued profitability.
Furthermore, inflation is expected to continue, and if consumers can’t afford to buy new cars, rentals look more attractive.
But inflation increases operating costs, which puts pressure on company margins.
Deutsche Bank Research analyst Chris Woronka has a $210 price target on Avis and rates it a Sell. Analyst consensus from six estimates is $166. Meanwhile, Jefferies analyst Hamzah Mazari, who put a $100 price target on Avis in August, said, “Historical valuation ranges may not be relevant anymore”.
Did Elon Musk’s tweet trigger interest in Avis?
Last week a Bloomberg story announced Hertz was ordering 100,000 Tesla’s. This sent both Tesla (NASDAQ: TSLA) and Hertz’ share price’s soaring.
However, a few days later Elon Musk cast doubt on the deal after tweeting "no contract has been signed yet" with Hertz, causing many to wonder whether the plan was as concrete as it initially seemed to be.
This tweet may have encouraged investors to jump ship from Hertz to Avis. Indeed, Avis is apparently popular with institutional investors employing a pair-trading strategy with Hertz.
Will Avis go electric?
With the investor reaction to Hertz’ Tesla order bullish for EVs, it’s natural to wonder if Avis is headedin the same direction. In its investor call, Executive VP and CFO Brian Choi said:
I think the bold move made by one of our competitors and that announcement is good for the overall rental car industry. It pushes pace and draws attention to what needs to be done to absorb electric vehicles at scale.
He went on to confirm that the company has been optimizing a product line for EVs with its OEM partners and infrastructure partners. The company is moving in this direction but is not ready to publicly announce its strategy.
Is Avis a meme stock?
Just two months ago, Avis shares were trading around the $80 mark and at the time of writing it’s $357, after hitting a high of $545 on Tuesday. That’s an insanely huge leap for a mainstream run-of-the-mill company.
After the positive earnings beat dropped, along with the news it might be going electric, the news rapidly spread. Within no time, Avis stock became the number one trending company on Stocktwits and was a hot topic in Reddit’s WallStreetBets forum.
The record share price surge resulted in 11 trading halts as volatility wreaked havoc.
The interest among retail investors, in WSB in particular, begs the question, to what extent has the momentum been manufactured? Is Avis now a meme stock?
Short interest in Avis stock is around 20% and has been rising over the past few months. So the positive slant on Q3 earnings took many institutional investors by surprise and gave fuel to the WSB fire.
Short interest is a signal these meme stock traders jump on as it can allow them to force institutional investors into buying shares to cover their short positions, thereby pre-empting a short squeeze.