Vroom Is Likely To Rise As More People Buy Used Cars Online

Vroom (NASDAQ:VRM) is likely to keep on rising as online used car sales catch on. This may seem a little puzzling though since the company and Vroom stock is nowhere near making any money.

Vroom app is open on a smartphone
Source: Lori Butcher / Shutterstock.com

Since the company went public about a month ago at $22 per share, Vroom stock has risen over 125%. At this price, the company has a market value of $5.8 billion.

But its sales last year were only $1.19 billion. That means Vroom stock trades for 5 times sales. That seems pretty high for a company with no profits. But keep in mind two things: this is a historical measure, and Vroom’s sales are expected to grow very fast over the next several years.

Vroom’s Sales Prospects Are Impressive

Vroom’s e-commerce division accounts for 62% of its total sales. From 2016 to 2019 this division’s sales grew from $101 million to $588 million in 2019. Moreover, its e-commerce sales grew 159% in the first quarter on a year-over-year basis.

In other words, people are buying their cars online more and more. They either don’t want the hassle of haggling with salespeople and/or they are scared of catching Covid-19. This trend is likely to continue at a fast pace.

For example, one analyst believes the e-commerce division will hit $1.5 billion in sales by the end of 2021. Assuming another 50% increase by 2022 the division will be the main source of Vroom’s sales.

Analysts polled by Seeking Alpha believe sales will hit $2.73 billion by 2021. At this rate, sales could hit $4 billion before 2022.

Therefore, looking at Vroom’s $5.8 billion existing valuation from this angle, it doesn’t look that expensive. For example, it has a 4 times sales market value by 2022, the total market cap would be $16 billion (4 x $4 billion in sales).

That implies that Vroom stock will rise 186% from $50.24 to $144.10 per share.

What Analysts Are Saying About Vroom Stock

Renaissance Capital’s IPO strategist, Matthew Kennedy, was quoted by MarketWatch as complimenting Vroom. He said that it is one of the “next-generation companies that can thrive in a post-COVID economy.” As a result, the market highly values these companies, he said.

On July 6, Seeking Alpha reported that a number of firms had issued positive reports on Vroom. For example, Stifel has a buy rating and $65 price target on Vroom, JPM Securities has a $66 price target, Baird has a $66 price target, Wedbush is at $64 and Wells Fargo has a $65 price target. These are all about $10 to $15 per share above the present price.

Seeking Alpha also quoted extensively from the Wells Fargo research report. The analyst there believes that Vroom will reach net income profitability by 2022.

What Investors Should Do With Vroom Stock

Many analysts compare Vroom to Carvana (NASDAQ:CVNA), which also sells used cars online. Carvana has a $22.5 billion market value. Analysts expect it to make $5 billion in sales this year. That puts it on a price-sales ratio of more than 4, according to Seeking Alpha.

Using the same multiple for Vroom, which is expected to make $1.42 billion in sales this year, means it should have a $5.68 billion valuation. That is lower than its present $5.8 billion market cap.

But since sales should skyrocket to $2.73 billion by 2021, the same multiple would put Vroom stock on a $10.92 billion market value. That implies the stock will rise 95% over the next year to $98.35.

At least one analyst on Seeking Alpha agrees with the thrust of my analysis method here. And as I pointed out earlier by 2022, the stock has a chance of hitting $144 per share, if sales reach $4 billion by 2022.

Therefore, I think a speculative investor might be willing to take a chance on Vroom stock. Keep in mind that the company does not make a profit. In fact, the company’s CEO said it has a “clear line of sight” to profits once it hits a sales pace of 200,000 vehicles. But, as Marketwatch pointed out, Vroom sold just 19,000 vehicles last year.

In other words, expect the stock to be volatile. This will be risky for most investors. Only those that can afford to lose a good deal in this stock should consider making the jump.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/vroom-stock-rise-used-car-sales-online/.

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