3 Things Investors Should Know About the New Deal Between Amazon and Hertz

Key Points

• Hertz will become the second merchant selling on Amazon's new Amazon Autos beta site.

• Hyundai already sells and leases new and used cars on Amazon Autos.

• Hertz is currently unprofitable. Amazon is wildly profitable. This deal won't change either of those facts.

• 10 stocks we like better than Amazon ›

Are you in the market for a new car -- and by "new" I mean "technically used, but new to you?" If you are, then your next car purchase might be just the click of a "buy it now" button away. Hertz Global (NASDAQ: HTZ) is about to start selling off some of its used rental cars on Amazon.com (NASDAQ: AMZN).

Hertz announced its collaboration with Amazon just last week, promising to make it possible for shoppers to "browse, finance, and purchase" from a selection of "thousands" of used automobiles being released from Hertz's fleet.

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Granted, Hertz already makes online car shopping possible through its own Hertz Car Sales website. But Hertz says it wants to "meet customers where they are," and Amazon is the No. 1 marketplace worldwide in terms of gross merchandise value sold. According to Hertz, this makes the company's new Amazon Autos sub-website an "ideal partner" for disposing of its unwanted inventory.

Here are three things you need to know about this deal, whether you're a car buyer, an investor, or both.

Image source: Getty Images.

1. Amazon is No. 1. Hertz is No. 2

First, you should know that Amazon's website describes Amazon Autos as only in "beta" service currently, with Hyundai as its sole merchant, offering purchases and leases of new and used Hyundai automobiles. The way Hyundai operates on the site, listings "from local dealers" appear on the Amazon Autos page, and can be browsed and paid for there -- after which the buyer/lessor heads to the local dealership to actually take possession of the automobile.

Although it's not yet active on the website, Hertz's operation will apparently be similar.

As Amazon explains in its press release, Hertz will become Amazon Autos' "first fleet dealer" (and therefore, its second dealer, total). As with Hyundai, browsing and purchase will be done on Amazon's site, after which the buyer will head to a Hertz Car Sales location to take possession. Initially, Hertz locations in Dallas, Houston, Los Angeles, and Seattle will participate in the program. If all goes well, the project will later expand to Hertz Car Sales' 45 total locations nationwide.

2. Hertz is fulfilling a consumer demand

An article on Automotive Dive earlier this month hinted that Amazon Autos' foray into online car selling appears to be successful. Already, Hyundai has nearly tripled the number of cities participating in the program from 48 to 130 U.S. cities, and expanded from selling only new automobiles on the site to selling pre-owned Hyundais as well. Hyundai dealerships not already part of the program "have expressed strong interest in being added to the platform."

One thing Hyundai apparently is not doing is reselling other companies' cars that have been traded into its dealerships. And according to Fan Jin, director and general manager of Amazon Autos, "[T]he number one ask from all customers is 'can we see more selection'? Can we see more other brands of cars, other vehicle conditions, new, used, certified, pre-owned cars?"

Hertz could be the answer to that request.

According to its website, Hertz rents more than two dozen different car brands and, at last report, had more than 500,000 vehicles in its fleet. With rental car companies usually hanging on to their cars for only between six and 36 months, this implies Hertz has in the neighborhood of 250,000 used cars for sale annually. Hertz seems well-positioned to respond to this consumer demand -- albeit only for used cars.

3. Hertz so bad (but Amazon so good)

Amazon has found a useful partner in Hertz, and one that could very likely build on the popularity of its Amazon Autos website, initially pioneered by Hyundai alone. It remains to be seen precisely how many car sales Amazon will end up facilitating through the site, of course. For now, we don't know what kind of revenue Hertz will be sharing with Amazon.

As such, it's hard to say precisely how profitable this "beta" foray into used car dealing will turn out to be for Amazon (although I'm cautiously optimistic). What I can say is that it's probably not going to be enough to turn Hertz stock into a buy. Here's why:

Hertz suffered mightily early in the pandemic, and while business started picking back up in 2021, the company has run into a slump of late. Hertz has lost money in each of the last six reported quarters -- and burned cash in four of them -- according to data from S&P Global Market Intelligence. Hertz also exited the pandemic with a boatload of debt, and still has $19.4 billion more debt than cash on its balance sheet.

Debt payments hinder the company's efforts to return to profitability, and the lack of free cash flow makes it hard to pay down the debt. Selling a bit more inventory via Amazon, rather than on its own website, isn't going to move the needle much for Hertz stock.

I'm more optimistic about the prospects for Amazon. The company is clearly the financially stronger company in this relationship, giving it a better position to negotiate for itself a fat portion of any profits Hertz produces from its sales. Amazon is also already profitable, trades for 33.5 times earnings, and has a 16.8% growth rate.

Amazon is not a cheap stock, to be sure -- but it's a whole lot safer than Hertz.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.