Despite the current health and economic uncertainty, there have recently been several notable IPOs, such as Vroom (NASDAQ:VRM) stock, which made its debut on June 9 at an opening price of $40.25. On July 6, the share price of the used car sales company hit a high of $60.91. Since the IPO, Vroom stock is up over 20%, hovering shy of $50.
A report by McKinsey & Company estimates that, “The US used-car market is more than twice the size of the new-car segment and is outpacing it in growth… Americans buy 39.4 million used cars each year, versus 17.3 million new ones (2018), and that used-vehicle sales will increase faster than new-vehicle sales over the next five years.”
Given the favorable growth expectations for the used-car segment, there has been significant interest in Vroom’s IPO.
Several analysts have recently issued price targets on the stock. They include a $66-target by JPM Securities and a $65-target by Stifel Nicolaus. Now investors are wondering whether the buoyant mood will continue in broader markets, taking prices of new issues even higher. Therefore today, I’ll take a look at whether Vroom stock should belong in a long-term portfolio.
How Vroom Makes Money
New York-based Vroom is an online used car retailer that was founded in July 2013. It operates an online e-commerce platform. In addition, it runs physical operations, sourcing and purchasing used vehicles to be sold on the platform. Vroom also delivers vehicles sold to customers’ doorsteps. For the time being the group only serves customers in the U.S.
- Ecommerce: includes retail sales of used vehicles through the eCommerce platform (close to half the revenue);
- TDA: includes the company’s only physical retail location, its owned vehicle reconditioning center as well as Vroom’s Sell Us Your Car Centers (about 33% of revenue);
- Wholesale: represents sales of used vehicles through wholesale auctions (close to 18% of revenue).
Given the pandemic lockdown and social-distancing realities, analysts are bullish on online car sales. And in case of a prolonged economic contraction, more consumers may easily turn to buying used cars.
The fact that Vroom has also been delivering cars to purchasers nationwide is seen as a potential catalyst, especially in these extraordinary times when many local car dealerships were closed for many weeks.
Recent research led by Christoph Ungerer of the World Bank Group highlights, “In the fight against COVID-19, e-commerce can help further reduce the risk of new infections by minimizing face to face interactions. It can help preserve jobs during the crisis. And it can help increase the acceptance of prolonged physical distancing measures among the population.”
Put another way, there are several important immediate- and long-term catalysts that are likely to drive the price of Vroom stock higher in the coming quarters.
The Bottom Line on Vroom Stock
Recent weeks have seen risk appetite increase on Wall Street. As the busy earnings season rolls in, investors should be ready to embrace more volatility in many stocks, including new issues such as Vroom stock.
Stay-at-home, work-from-home trends of the past several months also mean that more consumers are shopping online, even for bigger ticket items like used cars. Thus Vroom is likely to see increased sales in the rest of the year.
If you are a long-term investor, you may want to study the quarterly reports in 2020 to analyze the group’s fundamental metrics. Given the group’s established trading history, debt-free capital structure, and economic long-term tailwinds, I’d consider buying Vroom stock, especially if there is a short-term decline in price.
The current market cap of close to $6 billion means the company has room for growth. Meanwhile, it could also become an acquisition target.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.