I have the opportunity to write about Vroom (NASDAQ:VRM) one month after the stock began publicly trading. After an inauspicious first week, Vroom stock has soared as high as $60 per share. However, the stock has come back down to earth. And as of this writing, Vroom is trading approximately 6% higher than initial day of trading.
That kind of volatility indicates that the initial public offering halo is dimming. Investors are now trying to figure out Vroom’s long-term narrative.
However, one month doesn’t give investors much information to go on, particularly since the headlines have been fairly negative for the broader economy. As an increasing number of corporations announce layoffs, it’s becoming less likely that the V-shaped economic recovery will materialize.
And that doesn’t bode well for car sales in general. There’s no question that Vroom has a large opportunity to disrupt traditional dealerships. But this is a business that’s based more on demand than supply. And right now, that demand is in question.
The Car Buying Process Has Forever Changed
Vroom is being called a pandemic stock, but that’s not really the case. The car-buying process has been changing for quite some time. And for the most part, it’s been a change for the better. Even when I was buying my first car, the process seemed needlessly time-consuming.
Anything that can be done that respects my time and makes the process faster is appreciated. Companies like Vroom, Carvana (NYSE:CVNA) and CarMax (NYSE:CMX) are at the tip of this move to a digital car buying experience.
But the field is starting to get crowded. Although automakers have long relied on their dealer network, some brands are beginning to invest in online sales.
How Big Is the Opportunity?
According to the 2019 Digital Commerce 360 Online Vehicle Shopper survey, 49% of respondents expressed a willingness to purchase new vehicle entirely online. A 2019 Automotive Ecommerce Report reveals the compound annual growth rate of digital sales was 7.61% from 2015-2019.
In the same report the research firm Frost & Sullivan forecast that by 2035, consumers may purchase as many as 1.3 million vehicles online. This means that Vroom could potentially have a $400 billion addressable market in 10 years.
And when you factor in that the company generated less than $1.2 billion in revenue in 2019, you can see why investors are excited about the opportunity. Particularly with many Americans, for various reasons, choosing to stay home as much as they can.
However, the dealership model may not be dead. A separate survey by Autotrader (OTCMKTS:ATDRY) gives a slightly different picture of the car buying experience. Not surprisingly consumers are demanding a more personalized and exceptional dealership experience.
However, if the dealership is able to deliver that experience, 54% of consumers said they would buy from that dealership. And 72% of those surveyed said they would visit dealerships more often if the buying process was improved.
The Economy Is Slowing
As evidence of a V-shaped recovery fades, many major corporations are announcing layoffs. Boeing (NYSE:BA), Chevron (NYSE:CVX), and Levi Strauss (NYSE:LEVI) are just a few examples of companies that are instituting significant layoffs as the economic forecast deteriorates.
And that will be a drag on car sales. Digital or not, an automobile is not a defensive purchase. As spending pulls back, a new (or used) car is not going to be in a family’s purchase plans.
Don’t Let Vroom Stock Give You Sticker Shock
In a world where Home Depot (NYSE:HD) will deliver and install your backyard grill (with contactless delivery of course), it would seem that digital car sales are the wave of the future. And that could be reason for investors to pile into Vroom stock.
I think that forecast is spot on, but I’d still be very cautious. This is not a question of what Vroom is. It’s a concern about what the economy is not. Supply and demand still matter. And right now, I need to see evidence of more demand before I jump on Vroom stock.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.