If you haven’t paid attention to online car-buying platform Vroom (NASDAQ:VRM) since it zoomed in price shortly after its 2020 IPO, you may be shocked to see how far it has fallen. VRM stock is down 96% from its all-time high, and down around 92% in the past year alone.
What’s the main reason for this? You can lay most of the blame on the company’s decision to put high growth ahead of near-term profitability.
At first, it made sense why it was keeping its foot on the gas, so to speak. After all, it was looking to catch up to its much larger rival in the automotive e-commerce space. To do so, Vroom invested heavily into its growth. However, this “grow first, profit later” mentality has gotten out of hand. And it’s not only because the price of inventory (i.e., used cars) has gone skyrocketed.
The company’s overhead cost (as measured by SG&A, or selling, general and administrative costs) are up substantially as well. Given that the company is making little progress getting to the point of profitability, don’t let its low stock price, or its high cash position fool you. As its losses keep piling up, expect it to burn more of its cash. In turn, driving shares to even lower prices.
VRM Stock at-a-Glance
As mentioned above, Vroom is an online car buying platform. Offering an alternative to traditional dealerships, online platforms like this one took off in popularity during the pandemic.
Younger cohorts (Millennials, Generation Z) also prefer its contactless way of buying/selling a car, over dealing with an “old school” in-person dealer, which admittedly can be an awkward, frustrating, and uncomfortable experience.
There’s no denying that the company is experiencing record revenue growth. Per its latest quarterly results, Vroom’s revenue grew 92.7% during the December quarter, and 116.6% during 2021.
But reporting these numbers late last month didn’t result in a big post-earnings boost for VRM stock. Far from it, as the stock tumbled 46.6% the trading day after results hit the street.
Why? As investors have moved beyond their 2020/2021 “growth at any price” mindset, the top line wasn’t what was in focus. Instead, it was the company’s profitability (or lack thereof).
Reporting weak gross profit per unit (GPPU) numbers, it also reported heavy operating losses for the quarter. Adjusted EBITDA came in at negative $119.8 million.
No End in Sight for Its Profitability Problem
It may be tempting to look at VRM stock, and come to the conclusion that this is a situation that’s bound to improve. After all, if its high rate of growth holds up, couldn’t it in a matter of years scale its way out of the red?
Also, with over $1.1 billion in cash on hand, doesn’t it have the dry powder needed to ride out another year or two of losses? I’ll concede it’s possible that, in time, the business can scale its way out of its profitability problem. But that doesn’t mean its probable.
The used car market may remain very hot now. Yet the main driver of this robust demand (supply chain headwinds) is a temporary phenomenon.
Once the supply chain problems are resolved, and the production of new vehicles goes back up, the currently favorable supply/demand dynamics could quickly go out of its favor. Revenue growth could seriously decelerate.
As for its ability to ride out further high operating losses? A sales growth deceleration could result in a cash burn acceleration, as growth slows down while it’s still in heavy expansion mode.
In addition, cooling demand for vehicles may put pressure on margins, again causing it to burn through cash faster than currently expected. Even if sales growth holds steady, reaching profitability could still be a long ways away. Its SG&A expenses continue to go up, albeit not at as fast of a rate as its revenue growth.
The Verdict on VRM Stock
Vroom is yet another early-stage, high-growth company finding its unclear path to profitability under scrutiny.
You may think there’s a path for it to grow to a size where it can finally get ahead of its high operating costs. But between now, and when it reaches that point? Assuming it’s still solvent, it’s unlikely its stock price will be at, much less above, where it is today.
Instead, shares will have likely moved even lower. Either due to more investors bailing out of it, as it went through more of its cash position. Or due to dilution, in the future it may be forced to raise more capital (through a secondary offering) in order to sustain its expansion plan.
Earning an “F” rating in my Portfolio Grader, avoid VRM stock. Don’t find yourself tempted by its low low sticker (stock) price, only to find yourself “holding the bag” with a lemon.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
