Vroom Is on the Cusp of Disaster as the Economic Backdrop Bodes Poorly

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VRM stock - Vroom Is on the Cusp of Disaster as the Economic Backdrop Bodes Poorly

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If you happen to have a crystal ball that tells which company the meme-trading masses will anoint next, that might be the only thing that could help online auto retail firm Vroom (NASDAQ:VRM). Otherwise, this direct competitor of Carvana (NYSE:CVNA) — which also isn’t doing that well — should best be avoided. The losses for VRM stock tell you all you need to know.

On a year-to-date basis, just before the opening of the April 11 session, Vroom found itself down a staggering 80%. Over the same period, rival Carvana hemorrhaged more than 55%, which tragically looks decent relative to the crimson-stained VRM stock. Even more problematic, Vroom has cratered nearly 95% during the trailing year. Shares can’t get much worse than this without risking an utter implosion.

But to be fair, many of the problems impacting Vroom are tied to macroeconomic factors that no company can control. As I’ve mentioned before, some analysts are raising concerns about auto companies due to the soaring inflation rate.

In a nutshell, most people who buy new cars — about 85% of them — finance their vehicles. Of course, higher borrowing costs associated with rising interest rates to address inflation may impede demand. True, Vroom specializes in used vehicles. However, the basis of the argument is unchanged: higher borrowing costs for new or used cars will likely impact consumer behaviors.

The counterargument to the inflation-related storyline is that most Americans depend on cars for commuting and other important endeavors. Therefore, they have no choice but to put up with the higher rates. Fair enough. But the issue for VRM stock specifically is that consumers have many lower-cost choices to get the cars they need.

I understand Vroom’s has appeal as a convenient online acquisition of cars without haggling with salespeople. But with inflation rising faster than the pace of wage growth, any way to cut costs will likely attract consumers under this new paradigm. After all, this convenience comes at a price. Thus, VRM stock risks succumbing to analog competition, a development that the underlying company will be hard pressed to address.

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On the date of publication, Josh Enomoto did not have (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.


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