Vroom Has a ‘Check Engine’ Light on That You’re Not Seeing
While the novel coronavirus has been a terrible headwind for many businesses, other sectors have enjoyed renewed relevance. Take for instance the burgeoning online used car dealership industry. For most people, buying a car is a stressful experience in the best of circumstances and doubly so during a pandemic. Fortunately, though, companies like Vroom (NASDAQ:VRM) can alleviate the tension. But if that’s the case, why has VRM stock disappointed stakeholders?
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On the surface, it doesn’t seem like Vroom should suffer the ignominy of its negatively tilted trend channel. In its third quarter, the company produced a loss of $37.9 million, translating to an earnings-per-share (EPS) loss of 31 cents. However, the result beat Wall Street’s consensus target, which anticipated an EPS loss of 37 cents.
For revenue, the company generated over $323 million, which again exceeded the consensus estimate calling for about $310 million. Further, the breakdown was seemingly even more impressive for VRM stock. For instance, e-commerce revenue was $221.8 million, up 24.5% from the third quarter of 2019. In the wholesale segment, sales came in at nearly $64 million, up 8.3% year-over-year (YOY).
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Unit-wise, the e-commerce segment also moved 8,823 cars, up almost 59% YOY. Wholesale moved 6,166 units, a 13.8% improvement. Yet, as solid as these figures look, they’re actually quite poor for VRM stock.
Obviously, the most conspicuous indicator that not all is well is the company’s share price. On Nov. 11 — the day of the Q3 earnings report — VRM closed at $40.80. The following session, it finished down at $35.49, a loss of 13%. Subsequent trades only briefly improved the picture before shares tumbled back down.
So, are investors not giving Vroom a fair shake? As I’ll demonstrate below, Wall Street is actually acting quite rationally.
VRM Stock Lags the Industry
Despite the strong figures relative to consensus estimates, Vroom unfortunately underperformed against last year’s results. In total, Vroom’s revenue this Q3 was down 5% from Q3 2019’s tally of $340 million.
Now, if we were talking about a Covid-19-impacted industry, I think traders would give VRM stock the benefit of the doubt. However, the automotive sector has surprisingly been one of the more robust markets this year. Beyond that, used car dealerships have been plowing through inventory. As the Wall Street Journal pointed out, dealerships have paid top dollar for secondhand vehicles.
Largely, this is because the pandemic has disrupted global automotive supply chains. Therefore, automakers are playing catch-up with their production output. But that’s not the only reason for the remarkable demand. With urban residents fearful of taking public transportation, many have looked to purchasing their first car.
However, with inventory of desirable new cars at record lows, even drivers with cash can’t get their first pick. Frustrated, they have turned to used car dealerships. Therefore, Vroom’s apparent inability for to take maximum advantage of this industry-wide tailwind has clouded the stock.
More importantly, the company’s Q3 revenue miss of 5% is a tremendous distraction when you look at sector data. For used car dealerships, Q3 2020 sales amounted to $11.7 billion, up 17.4% YOY. Such a blistering miss — up 17.4% versus down 5% — can’t be ignored. Therefore, it doesn’t matter how management dresses up its Q3 results — the numbers were absolutely terrible.
Going back to the company’s revenue breakdown, the pain point was in its sole car lot in Texas. Revenue there in Q3 was only $37.2 million, down a staggering 63.9% from the year-ago quarter’s haul of $103 million. At a time when consumers were going crazy for used cars — pandemic or not — Vroom was caught unprepared.
Make-or-Break Moment in Q4
According to a recent read of the Manheim Used Vehicle Value Index, wholesale prices have demonstrated “continued seasonal strength.” What’s more, consumer strength for those in the market for a new-to-them car is very robust. In fact, as the report sampled in mid-November, prices for luxury cars are up 22.4% YOY.
That’s the good news — buyers aren’t looking for just cheap economy models. Instead, they’re willing to dish out the big bucks for luxurious brands. Yet Vroom has found itself on the wrong side of the fence. Management has been trying to expand its market share in the lower price category.
Ultimately, I see the upcoming Q4 earnings report as a make-or-break moment for VRM stock. If the company can somehow pivot effectively to consumer demand, Vroom might pay off. But with the evidence at hand, this is a pick you should leave in the junkyard.
On the date of publication, the InvestorPlace Research Staff member primarily responsible for this article did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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