Used Car E-Retailing Space Heats Up With Vroom's Nasdaq Debut

Amid coronavirus woes, e-commerce retailing and used vehicles are drawing interest from dealerships, customers and investors alike. Online auto retailing holds massive opportunities and is likely to transform the automotive market in a big way in the coming years. Used-car e-retailers including Carvana CVNA, CarMax KMX, AutoNation AN and CarGurus CARG are capitalizing on rapid proliferation of Internet and digital shopping. All these stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The used-car online retailer, Vroom is grabbing a lot of attention with its public-market debut lately. The stock is off to an amazing start and is likely to beef up competition in the online automotive retailing space. Shares of Vroom’s closest peer, Carvana have skyrocketed more than 600% from its 2017 IPO price. With automotive e-commerce holding significant promise, investors are super thrilled about Vroom.

Vroom’s Smash-Hit IPO

Vroom made a solid Nasdaq debut on Jun 9, with its share price more than doubling from its offering price on the first day of trading. The online used-car seller priced its IPO at $22 per share, above the targeted range of $18-$20, valuing the firm at $2.48 billion. It raised around $470 million in the offering, after selling more than 21 million shares. This was 13% more than it had earlier planned. The stock was up more than 117% on its first trading day, closing the session at $47.9. Its market capitalization closed at $5.4 billion. The stock further rose 4.36% yesterday to close at $49.99.

Vroom’s upsized listing is the latest sign of green shoots for the IPO market. Its stock price surge followed robust gains for various other IPOs of late including software company ZoomInfo Technologies, EV maker Nikola Corporation and record label Warner Music Group. The kickass debuts of these companies underscore investors’ strong demand for freshly listed stocks, as the IPO market is gradually gathering steam even amid a fragile period of global economy.

What You Need to Know About Vroom Before Placing a Bet

Listed on the Nasdaq under the symbol "VRM", the tech-fueled online used car seller is backed by General Catalyst Group, T Rowe Price Associates, Catterton Partners and Bill Gates’ Cascade investment office. Notably, AutoNation also holds around 5% stake in Vroom.

Business Operations: New-York based Vroom operates under three main business segments — Texas Direct Auto (TDA), e-commerce and wholesale. Vroom acquired TDA, a fellow car dealership, in 2015 in a bid to leverage each other’s strengths and boost operational expertise and reconditioning capacities. The e-commerce business, built on its online marketplace for buying and selling used vehicles, is the firm’s key business and growth engine. The wholesale segment represents sales of used vehicles through wholesale auctions.

Operational Performance & Financial Tidbits: It should be noted that Vroom has not turned a profit yet since its start in 2012. The firm incurred a loss of $143 million in 2019, which widened from $85.2 million in 2018. Net loss was $41.1 million in first-quarter 2020 compared with $27.1 million recorded in the prior-year period. The company does not expect to pay any dividend in the foreseeable future. As of Mar 31, Vroom had $169.8 million in cash and cash equivalents, and $145 million of long-term debt.

On a positive note, sales improved 39% year over year to $1.2 billion in 2019. During the first quarter of 2020, sales jumped 60% year over year to $375.8 million. E-commerce business, which forms the bulk of the firm’s top line, generated $233.2 million in revenues during January-March 2020, which skyrocketed 160% year over year. E-commerce units sold more than doubled to 7,930 in the first quarter of 2020. For the period of January 2019 to April 2020, e-commerce units sold witnessed CAGR of 121%. However, high expenses have been weighing on e-commerce gross profit per vehicle.

Coronavirus Impact: In a bid to preserve cash amid the pandemic, Vroom furloughed about a third of its workforce in early May, reduced marketing expenses and resorted to salary reduction. About 60% of the furloughed employees returned to work by the end of May. While consumers have been putting off big-ticket purchases, tech-focused used-car platforms like Vroom have proven to be more resilient. In fact, with the e-commerce business witnessing a surge amid the lockdown, the coronavirus outbreak is likely to be a shot in the arm for Vroom. Evidently, its sales surged in April and May, which were record months for the company as the need to purchase a vehicle seemed to have increased amid the virus scare.

Growth Prospects: Vroom’s CEO, Dave Jones expects the firm to turn profitable once it starts achieving annual sales of 200,000 units. If the impressive sales trend continues, the firm could reach the target in as soon as three-five years. In the near future, the firm intends to ramp up marketing and advertising expenses as it builds its brand, which may strain its margins. However, the company is expected to be a winner in the long term, given massive growth opportunities in the used-car e-retailing space.

Used-Car E-Commerce Market Poised for Growth

The U.S. used-vehicle market is red hot and generated approximately $841 billion from sales of roughly 40 million units in 2019. Per a survey conducted by CarGurus after the virus eruption, 61% of respondents will now prefer to buy a vehicle online compared with 32% prior to the COVID-19 pandemic. The used-car market has gained traction over the past few years and is poised to witness strong demand going forward. The highly fragmented nature of the industry makes competitive. The biggest used-vehicle retailer, CarMax holds roughly 3% market share in the industry. This offers opportunity for new players to enter the market easily.

Further, digital revolution is disrupting used-car retailing. Increased use of dedicated online sites to sell used cars is having a positive impact on the used-car market. Especially amid coronavirus, online traffic is on the rise, with auto dealers ramping up their digital capabilities to make deals with customers and arranging for home deliveries for vehicles. Used-car online retailers are positioned to thrive not only during the COVID-19 crisis but also in its aftermath amid the changing shopping patterns of consumers.

The used-vehicle market has one of the lowest e-commerce penetration levels, accounting for only 0.9% share of the total market currently. Hence, there is incredible growth potential on the back of increasing penetration of Internet services and rising adoption of online shopping. It is estimated that e-retailing in the used-vehicle market will grow to as much as 50% by 2030.

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AutoNation, Inc. (AN) : Free Stock Analysis Report
 
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