If you think that selling used cars online is the wave of the future, then Vroom (NASDAQ:VRM) is the stock for you. But the problem is that with higher sales, its losses and cash burn are only increasing. The new-age auto lot’s bottom-line losses do not bode well for VRM stock investors.
This is not what you hear from either the company or analysts. They tend to focus on the gross margins and the per-unit gross margins. From that standpoint, Vroom looks like a winner.
But the reality is far from that on a bottom-line basis.
What’s Behind VRM Financials
For example, in its latest Q3 earnings report, Vroom glowed about the 56% jump in cars sold. They also reported a 25% increase in revenue year-over-year (YOY) to $212 million. Moreover, gross profits rose 120% to $19.9 million.
But, as you know, gross profits are just the price of the car sold minus the cost of the car they acquired in an auction. It does not take into account operating costs, overhead, maintenance, legal, taxes and all the normal costs of running a business, especially a public one.
On an adjusted net income basis, Vroom lost a lot of money. The adjusted loss was $39.8 million, which was worse than the $37.9 million loss a year ago.
Moreover, even adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) numbers showed a loss. Companies like to show EBITDA profits when they can’t prove it is profitable on a net income basis. But Vroom lost $35.5 million in adjusted EBITDA for both Q3 2020 and Q3 2019.
Cash Burn Rises With Growth
And things are a good deal direr from a free cash flow (FCF) perspective. For example, the company bled out $185 million in free cash flow during the third quarter. This is more than 3x the $53 million it burnt through in Q3 2019.
Most of the cash outflow this quarter was from purchases of more cars to sell before payments were received to cover the gross margin. In other words, as sales grow, the company has a severe cash outflow problem.
The problem is that Vroom now has only about $220 million in cash on its books. So it can’t cope with another cash burn quarter like this again, without having to borrow more money or raising equity. It already has a huge $175 million vehicle floorplan, which is essentially vehicle-related debt.
However, for some reason, the market is willing to overlook these small details. Vroom now has a $4.87 billion market value at $37.43 per share, as of Nov. 27.
What To Do With VRM Stock Here
VRM stock went public at $22 in early June and it is still above that level. But it closed trading at $47.90 its first day and is still below that level.
In fact, in the past month, VRM stock is down almost 13%. Investors did not like what they heard from the company. Rival Carvana (NYSE:CVNA) is up more than 31% in the same period.
For example, Vroom provided another dismal forecast for its fourth quarter. Although sequential unit sales will grow 25% and 75% YOY, its adjusted EBITDA losses will rise even more.
Management now expects between $44 million and $52 million in EBITDA losses, an increase from $39.8 million in Q3. This almost for sure implies more cash burn from a FCF standpoint, which the company can ill afford.
Frankly, this is simply nothing to write home about. As it stands the $4.61 billion market capitalization is still less than 2x forecast 2021 sales of $2.48 billion. That still represents sales growth of 83.7% over 2020.
So here is where things stand from a valuation standpoint: Investors are essentially paying for sales and sales growth. They are, at least for the time being, overlooking the fact that the company can’t produce a profit on the bottom line.
The company tends to emphasize its gross profits, i.e., its trading profits. But its EBITDA losses and cash burn are mounting with higher sales. In the long run, this is unsustainable.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
