The sharp recent decline of Vroom’s (NASDAQ:VRM) shares, caused by the company’s lower-than-expected Q3 revenue guidance (at the midpoint of its guidance range), was overdone. As a result, the pullback of Vroom stock has created a very good buying opportunity for longer-term investors.
Although the company cited lower selling prices as the key reason for the guidance miss, solvable inventory shortages, along with tougher year-over-year comparisons, likely played a key role in the shortfall as well.
Meanwhile, Vroom’s marketing efforts, as well as highly favorable macro trends, should boost the company over the longer term.
A Closer Look at Vroom Stock
“We were so successful selling down our inventory in April, that we were somewhat caught off guard [by a subsequent demand rebound,” said CEO Paul Hennessy during Vroom’s Q2 earnings conference call.
He explained that, ever since, Vroom has continuously worked to increase its inventory, but that it has had difficulty doing so due to the strength of the demand for its vehicles.
From a common-sense standpoint, Vroom’s failure to obtain a sufficient number of cars to meet demand likely had a significant, negative impact on both its Q2 sales and its Q3 top-line guidance. After all, if a company doesn’t have enough supply to meet demand, then its sales would obviously be lower than if it did have enough supply to satisfy all of the demand.
Over the longer term, Vroom should be able to make deals that will allow it to obtain enough supply to meet demand. In fact, Hennessy noted that the company is working with “third-party reconditioning partners” to get capacity back up fast.
The CEO also pointed out that tougher comparisons in Q3 versus Q2 are also contributing to the decline of Vroom’s growth rates this quarter. He explained that the company began to ramp up its operations in the second half of last year.
Marketing Can Do Wonders for Vroom
Founded in 2013, Vroom is still a rather young company, so naturally it’s not nearly as well-known as the leader of the internet-based auto retail space, Carvana. Therefore, Vroom’s marketing efforts are very likely to meaningfully help it on both the supply and demand side.
On the demand side, marketing will attract new customers, and when it comes to supply, Vroom’s marketing efforts should entice more car owners to sell their vehicles to Vroom.
Hennessy noted that the company recently launched TV ads for the first time, and he said that the company intends keep investing money in brand recognition.
In-line with my previous predictions, automobiles have become much more widely used and more important to Americans during the pandemic. With travel on airplanes and mass transit down meaningfully, Americans have turned more than ever to their personal vehicles.
In fact, Investor’s Business Daily recently wrote:
“This summer, road trips both short and long have been all the rage as people shy away from breathing each other’s air …during the coronavirus pandemic. The upshot is a possible rebirth of the 1950s-era car culture, nearly seven decades after the fact.”
Another macro trend that should boost Vroom and VRM stock is the increasing incomes of millenials and members of Generation Z. The most likely Americans to buy cars online, these consumers should see their salaries rise as they get older, enabling more of them to purchase higher-end cars.
I believe that this phenomenon has been a key factor behind the rejuvenation of Snap (NYSE:SNAP) stock in recent years, and I expect Vroom stock to be lifted by it as well.
The Bottom Line on Vroom Stock
Clearly Vroom’s Q3 guidance miss was partially caused by supply difficulties that should be remedied soon. Going forward, the company should benefit from increased marketing and positive macro trends.
Over time, the market capitalization of VRM stock, which is currently $6.5 billion, should move much closer to that of Carvana (NYSE:CVNA), the leading online auto dealer. Carvana’s market capitalization is currently $31 billion.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.