Vroom (NASDAQ:VRM) saw a 53% drop in its cash from $1.13 billion to $600.7 million in its latest report for the first quarter (Q1). Obviously, it will be out of cash in short order if its losses stay this way. Vroom says it has a new plan. But the market is skeptical and VRM stock is down around 97% over the past year. Why hasn’t it cut costs drastically already?
Maybe this new plan has a chance of working. Vroom burnt through $236 million in operating and investing cash flow during Q1. However, this includes $268 million it spent on an acquisition of a financing company, United Auto Credit Corporation (UACC). Apart from this, the cash flow would have been positive for the quarter. That is a positive.
In addition, Vroom’s board fired its chief executive officer (CEO) and promoted the chief operating officer (COO), Tom Shortt, to be the new CEO with immediate effect. The new plan involves “right-sizing the organization through a workforce reduction.” It also intends to focus sales on more profitable used cars. In Q1, its per-unit gross margin dropped precipitously from $1,151 to $595. As a result, it is likely going to focus on higher-priced vehicles that don’t require a lot of rework.
Where This Leaves Investors in VRM Stock
The company has now started financing its purchases with its own securitizations rather than depending on traditional floorplan debt financing. This might lower its financing costs and allow it to effectively act as an agent for investors rather than a middleman merchant banker.
If it can ramp up this securitization process, it can potentially transform itself into a Rocket Companies (NYSE:RKT) (i.e., Rocket Mortgage) type profitable operation, taking fees everywhere instead of paying interest. Obviously, the analogy can transcend only so far, since Vroom is not likely to be a loan servicing agent like Rocket. But it can take placement fees, or whatever similar term is used, instead of paying interest.
But this is going to take time to happen. With a “right-sizing,” the new CEO might have a chance of turning a profit. Investors in VRM stock might have to be patient. So far, there is no real way to properly value this stock. Value investors will have to look carefully for signs that there is a margin of safety. So far, I do not see one. However, at least there is an inflection action point that can provide some hope for existing investors.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.