Vroom (NASDAQ:VRM), the e-commerce platform for buying and selling used cars, shot up 118% on its first day of trading. Positive ratings for Vroom stock are pouring in after its impressive IPO. The consensus is that the company can take advantage of pandemic-driven tailwinds and long-term growth opportunities through its brand equity. What does this mean for Vroom stock?
With the market for used cars expected to grow to $25 billion by 2023, analysts believe that there is room for multiple winners in the industry. Analysts forecast room for double-digit growth for companies operating in the online used car business. Vroom, in particular, has been more efficient with its operations compared to its primary competitor in Carvana (NYSE:CVNA).
Let’s look at some of the reasons why Vroom has been on a tear off late and a hot stock at this time.
Vroom’s Innovative Platform
We are all aware of the inconveniences of a typical vehicle transaction. It involves an array of pressure tactics employed by dealerships, inconsistent vehicle quality and the endless wrangling over the price, quality or any other issue.
Vroom solves all of these issues by enabling car buyers and sellers to interact online. It also provides vehicle pick-up and delivery. Moreover, it also offers a seven-day return policy. Therefore, it effectively eliminates the hassle of a traditional vehicle transaction. Buyers can easily research whatever car they prefer online and avoid haggling thanks to Vroom’s proprietary algorithms on its inventory. Then, Vroom delivers the vehicle to the new owner with a seven-day return policy.
Vroom’s website had nearly 1 million visitors in the first quarter, and the company has been hugely successful in developing its brand with a 130% increase in site traffic on a year-over-year basis.
Additionally, one of the advantages of Vroom’s business model is that it owns the cars it sells, which means customers are purchasing directly from its inventory, which amounted to $179.6 million in the first quarter of 2020. Therefore, the company is not asset-light by any means and can effectively scale its operations in the future.
What About the Financials?
Vroom’s financials suggest that the company is in a healthy spot. Last year, it generated roughly $1.19 billion in sales, growing almost 24% on a year-over-year basis. Perhaps what is most impressive is that its growth hasn’t appeared to slow down in the first quarter of 2020. It’s up 60% on a year-over-year basis.
Management remarks that the novel coronavirus impacted its business by roughly 15% in mid-March. To maintain unit sales, it offered higher discounts, which could affect its margins heading into the second quarter. The table above shows that the company generated approximately $1,800 in gross profits, but that number should fall in the second quarter.
Going by the company’s recent history, it has been successful in lowering variable costs substantially. For example, from October 2019 to February 2020, variable costs were down by 33%. However, at the present moment, the company is looking to focus on expanding its market share with profitability in the rear-view mirror.
There a lot of positives if we compare Vroom’s performance to Carvana. Carvana has a significantly higher market capitalization, and it does not associate with the no-frills service that Vroom offers. However, as we can see from the table above, Vroom has a 15% edge over revenue growth and a better net margin than Carvana. Perhaps the most obvious difference between the two is their debt levels, as Carvana is heavily geared at this point. Vroom has managed its debt levels impressively, which gives it a lot of room to scale its business.
The Bottom Line on Vroom Stock
There are, however, certain risks that Vroom needs to be wary of in sustaining its business model. Firstly, maintaining the quality of its inventory is extremely important, and sourcing for vehicles that are high in demand is always going to be a challenge for the company. Inventory maintenance is key for controlling maintenance costs. Otherwise, maintenance costs will continue to lower margins and become a severe issue for the company.
High-demand vehicles are extremely important as they increase the revenue per unit.
Vroom stock has taken a breather after a massive opening on its first day of trading. The stock is currently trading at $48, but analysts believe that its mean target price is $60.67. I expect the stock to grow once we get past the coronavirus episode later in the year. The company is in a strong position to capitalize on renewed consumer confidence in the post-pandemic world.
Therefore, Vroom is a strong buy for me.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.