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Carvana or Vroom: Which Online Car Retailer is Primed to Race Ahead?

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·5 min read
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Used car demand has notably increased over recent months. Factors like an uncertain economy, the preference for an owned vehicle given the apprehension to use public transportation amid the pandemic and tight inventories have been driving the surge in demand.

Benefiting from this trend are retailers like CarMax, AutoNation, Vroom and Carvana. However, skeptics wonder whether these retailers will continue to enjoy strong growth once the pandemic abates. Both Carvana and Vroom remove the dealer from the picture and sell used cars directly to customers. We will use the TipRanks Stock Comparison tool to evaluate Carvana against Vroom and find the stock that could fetch investors higher returns.

Carvana (CVNA)

First, let's look at online car retailer Carvana, which buys, reconditions and sells used cars. Following pandemic-related disruptions earlier this year, the company bounced back strongly and generated revenue of $1.54 billion in 3Q, reflecting 41% year-over-year growth. What’s more, 3Q was the first EBITDA positive quarter for the company.

Following the results, Stifel analyst Scott Devitt upgraded Carvana to Buy from Hold and increased the price target to $225 from $210, stating, “We now see a more favorable risk/reward setup at current prices given incrementally positive industry data points indicating broad improvements in supply levels (used retail days supply close to normal at 45 days, according to Manheim) and a path to pre-pandemic inventory levels in the coming quarters as Carvana ramps capacity in new IRCs [inspection and reconditioning centers] and sources more vehicles from consumers, which carry higher margins.”

Meanwhile, Carvana recently launched its tenth Inspection and Reconditioning Center near Columbus, Ohio, increasing its annual production capacity to nearly 500,000. It expects to open the 11th IRC by the end of this year, which will boost its capacity by 100,000.

Over the long-term, Carvana aims to have an annual production capacity of more than 2 million. The company believes that it can enter more markets than many of the larger dealerships because of its lower cost structure, which allows it to efficiently function in smaller markets. (See CVNA stock analysis on TipRanks)

Last week, Jefferies analyst John Colantuoni initiated coverage of Carvana with a Buy rating and $300 price target. Colantuoni views the $550 billion market for used vehicles as "ripe for disruption" and believes that the stock could double if it maintains its historical pace of growing market share.

With shares rallying 184% year-to-date, the average price target of $244.41 indicates a possible downside of 6.5% in the months ahead. The Street has a cautiously optimistic outlook on the stock, with a Moderate Buy analyst consensus based on 13 Buys and 5 Holds.

Vroom (VRM)

Vroom is an e-commerce platform for used cars, which went public in June. The company also generates revenue through wholesale auctions of vehicles that do not meet its retail sales criteria. Additionally, the company sells its used cars at its sole physical location–Houston-based Texas Direct Auto, or TDA. While Vroom’s e-commerce revenue growth has been strong, lower TDA sales (due to Houston being one of the COVID-19 hotspots) have been a drag on overall revenue.

Notably, 3Q revenue fell 5.1% to $323 million as a 24.5% rise in e-commerce revenue and an 8.3% growth for the wholesale business were more than offset by a 64% drop in TDA revenue. However, the company narrowed its adjusted loss per share to $0.29 in 3Q20, from $0.31 in 3Q19, helped by improved e-commerce and wholesale gross profit.

Looking ahead, Vroom expects 4Q e-commerce units sold growth to accelerate to 74%, compared to the 59% growth in 3Q based on strong used-cars demand. (See VRM stock analysis on TipRanks)

Earlier this month, Wells Fargo analyst Zachary Fadem reiterated a Buy rating on Vroom with a $55 price target after hosting the company’s management at the Wells Fargo TMT Summit. Fadem stated, “In our view, tone was constructive as management remains bullish on NT [near term] demand trends, accelerating share shift online, and the LT [long-term] scalability of its asset light model.”

“While shares appear to be in the penalty box (-18% since Q3 print vs. +3% SPX) and expectations more in check (vs. initial post-IPO levels), we see an improving setup with shares trading -78% vs. CVNA (on CY21E EV/Sales) yet potential for sharply accelerating units, sales, and GPPU [gross profit per unit] in FY21. We believe VRM remains in the early stages of robust LT growth in a large ($840B) and highly fragmented category that is online beginning to pivot online,” added Fadem.

Indeed, the company is focusing on the expansion of its e-commerce business and expects TDA to continue to be a “decreasing contributor” to its future results. Vroom is scaling its inventory and its reconditioning capacity. It has added an additional third-party reconditioning center to its footprint and is increasing capacity within its existing locations.

Overall, the majority of the analysts covering Vroom are bullish on the stock. 10 Buys, 1 Hold and 1 Sell add up to a Strong Buy analyst consensus. Following the recent sell-off, the average price target of $57.45 indicates an upside potential of 68.1% in the months ahead.

Conclusion

Based on the recent operational performance, Carvana has fared better than Vroom. That said, the Street’s outlook shows an inclination towards Vroom, with expectations of improved results in 4Q and into 2021. Also, following the recent pullback, analysts see significant upside in Vroom, while the average price target indicates that Carvana stock has run its course.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment