Recent days have seen investor attention turn to automotive e-commerce platform RumbleOn (NASDAQ:RMBL). RMBL stock was trading around $10 on July 16. The next day, the shares hit almost $40. Now they are around $23.
InvestorPlace’s William White has recently written in detail how RMBL stock raced higher following a partnership announcement between the company and CarGurus (NASDAQ:CARG). However, that initial enthusiasm seems to be wearing off.
Therefore today, we’ll take a closer look at the fundamentals and the price movement of the Irving, Texas-based company. If you are not yet a shareholder, you may want to wait before you commit new capital into the businesses. Here’s why.
How Q1 Results Came
RumbleOn is an online platform for buyers and sellers of recreation vehicles, primarily pre-owned Harley-Davidson (NYSE:HOG) motorcycles and other powersports. In late June, the e-commerce company released its first-quarter FY20 results.
Total revenue came at $144.4 million, up 13.8% from Q4 of 2019. Adjusted gross profit was $11.6 million, excluding the $12.9 million in impairment and net realizable value adjustments for inventory. Adjusted EBITDA loss was $6.5 million.
Two segments contribute to RumbleOn’s revenue:
- Pre-owned vehicle sales (of powersports and automotive)
- Vehicle logistics and transportation services (provide nationwide automotive transportation services between dealerships and auctions).
Automotive and powersports sales provide about 79% and 16% of revenue, respectively. The remaining 5% comes form vehicle logistics and transportation services.
During the quarter total vehicle unit sales were 7,420. Gross margin on vehicles sold was 6.8%. Investors also noted that powersports sales increased by 39.2% from Q4 of 2019.
In the quarterly report, management highlighted the uncertainty posed by the COVID-19 pandemic. CEO Marshall Chesrown commented, “Although we are optimistic, we remain cautious. We expect continued fluctuations in market trends that will impact our business throughout the remainder of this year and don’t anticipate sales level getting completely back to normal until potentially late in the year or early 2021.”
Yet the company believes the group hit the bottom of the downturn in mid-April, with the largest unit sales decline and its lowest level of inventory acquisition during the quarter. Total unit sales for the month of April were down 66% from January levels. However, the rebound in May and June has been higher than expected.
Following the earnings release on June 29, RMBL stock was fairly flat, trading around $10.
Sizable Reverse RMBL Stock Split
On May 20, 2020, the company effected a 1:20 reverse split of its issued and outstanding Class A Common stock and Class B Common stock. Such a move had been necessary as over the past year, RMBL stock has been in constant decline. And the Nasdaq warned the company that the shares were in danger of being de-listed. In other words, RumbleOn shares have regained compliance.
As a result of the reverse stock split, the company now has outstanding 50,000 shares of Class A stock and approximately 2,162,696 shares of Class B stock. Needless to say, this reverse split has had no impact on the group’s fundamentals.
Many penny stocks do a reverse stock split at some point in their trading history. They either do not want to be delisted from the stock exchange or would like their stock price to not look very cheap, especially in the eyes of potential institutional investors. But reverse splits are rarely successful, according research by led by Karyn L. Neuhauser at Lamar University.
“Using a sample of 1,206 reverse split stocks during the 1995–2011 period, we find only 500 reverse splitting firms are able to survive on their own for five or more years. Of the 706 firms that are unable to survive independently, about 20% are acquired by another organization while 80% get delisted for other reasons, usually due to an inability to meet listing requirements or bankruptcy.”
These numbers should possibly be a warning for potential long-term investors in RMBL stock. Unless the company can show the Street that it will increase revenue and become profitable, there may be more pain ahead for the shares.
The Bottom Line on RMBL Stock
I regard RMBL stock as a high-risk, high return investment. There will likely be profit-taking in the shares soon, pressuring them toward the $15-level or even below. Although the deal with CarGurus is potentially exciting, I’d wait to see how it’d reflect in the upcoming earnings reports. Management would need to offer a clear path to achieving EBITDA profitability on a full-year basis, preferably in 2021.
Potential investors in the stock should realize that unless sales volumes and margins improve further, the company may not be able to create much shareholder value in the near future. Let the buyer beware.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, 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 did not hold a position in any of the aforementioned securities.