Vroom’s Insiders Make It a Long-Term Buy

The used car e-commerce platform Vroom (NASDAQ:VRM) went public on June 8 at $22 a share. In less than a month, Vroom stock has more than doubled. The company’s much bigger competitor, Carvana (NYSE:CVNA), went public at $15 in April 2017. CVNA stock is up 757% in the little more than three years since.

Vroom Stock Will Ride Multiple Trends to Long-Term Success
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One thing is for sure. Investors love the used car market, so I’m sure many InvestorPlace readers are trying to figure out which of the two is the better long-term buy. Perhaps I’ll consider that in a future article.

For now, thanks to Vroom’s insiders, I like its chances of success. Here’s why.

For Starters, Bill Gates Owns Vroom Stock

Bloomberg made a big deal when Vroom went public in June out of the fact that Bill Gates’ investment company, Cascade Investment LLC, doubled its money in a single day from the used car platform’s initial public offering. Cascade owned 7.2% of the company before its IPO and 5.9% after.

If you bought shares in Vroom’s IPO, the good news is that none of the insiders, including Gates, sold any shares in the IPO, with 100% of the $497.2 million in net proceeds going to fund Vroom’s expansion.

That’s the way IPOs ought to be with insiders exiting down the road after the lockups have expired and insiders move on to their next investment. In the case of Gates, I’d watch to see if Cascade hangs on to the shares. Given what’s happened with Carvana, I would be shocked if it doesn’t remain a significant shareholder.

And that’s an excellent thing because if you look at the holdings of both Cascade Investment and the Bill and Melinda Gates Foundation, there aren’t a whole lot of losing investments among them.

L Catterton and Bernard Arnault

The largest Vroom shareholder is L Catterton, a private equity firm with 20.6% of the company before the IPO and 16.8% after.

L Catterton was created in January 2016. It was the combination of Catterton — a private equity firm focused on consumer-facing companies — in partnership with LVMH (OTCMKTS:LVMUY) and Groupe Arnault, Bernard Arnault’s family holding company.

Bernard Arnault is the world’s third-wealthiest person at $90.9 billion, about $24 billion behind Bill Gates, the second-wealthiest person in the world.

The fact that two of the wealthiest people on the planet were willing to be early backers of Vroom says a lot about its management team and business model. This alone should mean something to investors.

In my opinion, Bernault Arnault is one of the best capital allocators on the planet.

The Rest of the Investors

The second-largest investor with 13% of its stock post-IPO is T. Rowe Price (NASDAQ:TROW), an asset management firm with more than $1 trillion of assets under management. In 2017, the asset manager said it had more than $2.5 billion invested in private companies on behalf of its investor clients. I’m sure that’s grown in the three years since.

Another prominent investor is General Catalyst Group and its seventh fund, which raised $675 million in 2013, to invest in technology businesses like Vroom. Amongst the fund’s managing partners is former American Express (NYSE:AXP) Chief Executive Officer Ken Chenault. The former CEO’s son is also an important member of the General Catalyst team.

If you look through the company’s roster of portfolio companies, I think you’ll agree it’s an impressive list. It’s got an eye for growth and quality.

Lastly, the other big insider of Vroom is AutoNation (NYSE:AN), who owns 4.8% of its stock post-IPO. Not coincidentally, Bill Gates and Cascade Investment own 20.6% of AutoNation, making it the largest shareholder of the dealership network, 710 basis points higher than ESL Investments, Eddie Lampert’s investment vehicle.

The Bottom Line

While Vroom assembled a magnificent stable of investors, there is no guarantee that this A-list group can deliver profitable growth. That’s up to Vroom CEO Paul Hennessy and the rest of the management team.

In 2019, Vroom had an operating loss of $133.1 million and $1.19 billion in sales for an operating margin of -11.2%, By comparison, Carvana had an operating loss of $364.6 million and $3.42 billion in sales for an operating margin of -10.7%.

The two companies are in absolutely the same spot except Carvana’s sales are three times higher. In the end, the big winner will be the one that executes its plan better.

Having an A-list roster of investors will help keep Vroom on track. I’m not sure the same can be said about Carvana. That said, I’ll leave the comparisons to another time.

For me, Vroom stock is still a buy, despite the capital appreciation over the past month.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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