Alongside the rest of the tech sector, shares of freshly public Vroom (NASDAQ:VRM) have taken a nose dive recently, with Vroom stock falling as much as 30% in a matter of days.
Source: Lori Butcher / Shutterstock.com
But guess what?
Vroom is still pioneering a new era of online car buying and selling. The company is growing by leaps and bounds. And the opportunity for sustained huge revenue and profit growth over the next five to 10 years is compelling.
The only thing that has changed is that macroeconomic noise and volatility pulled the Vroom stock price down into undervalued territory. This volatility will pass. When it does, VRM stock will reverse course, and head sharply higher. So ignore the noise and buy the dip.
Here’s a deeper look.
A New Era of Car Buying and Selling
Thanks to the novel coronavirus, we are entering a new era of car buying and selling – one that is faster, more convenient, more streamlined, cheaper, more relevant and overall just better than the status quo.
What does this new era look like?
We all buy cars online.
I get that this is a tough concept for some of you to wrap your head around. You need to test drive the car. See it. Feel it. Inspect it for scratches and dents. Really get to know everything about the car before plopping down $10,000-plus. This is largely why the auto market is so under-penetrated in terms of e-commerce, with online sales accounting for just 0.9% of all used car sales (versus 16% of total retail sales).
At the same time, though, no one likes the car buying process. It takes forever. It’s highly fragmented. There is limited availability. There’s a lack of transparency, and the industry is notorious for aggressive sales pressure tactics. No wonder more than 80% of us say we are dissatisfied with the car shopping process, while only 9% of say we trust car salespeople.
To that extent, the future here is clear. As soon as technology advances to a point that it can fully address the shortcomings of online car shopping, the auto market will move online.
The Future Has Arrived
That future is happening now.
Companies like Vroom and Carvana (NASDAQ:CVNA) are leaning into unique technologies like augmented reality and 3D picture viewing. This will give consumers a robust “bird’s eye view” of cars that is exceptionally granular. Consumers will be able to get exceptionally comfortable with vehicles without having to see them.
At the same time, these companies are leaning into data-driven strategies to competitively price their vehicles, create a dynamic and real-time assortment of vehicles, expand inventory to a national level and allow for smart financing.
They feature contactless delivery to your doorstep. You can test drive the vehicles after purchase, and if you don’t like what you bought, you can return it for a full refund within seven days. Plus, you can also trade-in your old car, or simply sell a used vehicle, without leaving your home. They come to you.
In other words, Vroom and Carvana are pioneering a new and improved way to buy cars. It’s all online. It’s streamlined, cheap, fast and allows consumers nearly as much comfort as the physical shopping experience (thanks to AR, 3-D pictures and seven-day refund policies).
Adoption of this new business model has accelerated during the Covid-19 pandemic. In the first half of 2020, Vroom reported a 108% rise in e-commerce units sold.
Adoption will continue to accelerate for the foreseeable future, thanks to secular digitization tailwinds.
As it does – and as we enter this new era of online car buying and selling – Vroom will grow by leaps and bounds, and Vroom stock will head way, way higher.
Vroom Has Competitive Advantages
Vroom isn’t just another upstart, online auto e-commerce marketplace. The company is supported by multiple enduring competitive advantages.
First, the company has enormous inventory that measures in the thousands of vehicles. It’s tough for anyone else to attain those inventory levels without huge capital injections.
Second, Vroom has distribution locations all across the country. These are necessary for quick delivery of purchased cars, and Vroom’s widespread distribution network will be tough to replicate for new entrants.
Third, Vroom has powerful brand equity. Next to Carvana, these are pretty much the only two auto e-commerce marketplaces which most consumers recognize – and that’s important because it means consumers looking to buy and sell cars online will first go to Carvana or Vroom.
Fourth, the company is sitting on a treasure trove of years worth of data, the likes of which nobody else has and which Vroom leans into every day to create competitive advantages on the pricing and inventory fronts.
Overall, then, it is quite likely that Vroom will sustain a leadership position in the online used car market for the foreseeable future. Assuming so, then Vroom stock has enormous upside potential.
Huge Upside Potential for Vroom Stock
Every year, around 40 million used cars are sold in the U.S.
Vroom sold just 19,000 cars through its e-commerce platform last year. That number is up more than 100% year-over-year through the first half of 2020.
Considering the significant under-penetration in used auto retail at just 0.9% and the massive tailwinds at Vroom’s back thanks to the pandemic, it is quite likely that Vroom sustains strong, 20%-plus unit growth for a lot longer.
Average sales prices will trend higher with increased demand, better pricing strategies and inflation. Gross margins will improve with scale. Opex rates will come down, mostly because this is an asset-light business with mostly fixed costs that won’t trend that much higher as revenues push higher.
Net net, I see Vroom going from a ~20,000 cars sold, ~$1.2 billion and ~$130 million EBITDA loss business in 2019, to a ~550,000 cars sold, $23 billion and $1.2 billion EBITDA business by 2030.
Based on those assumptions, my modeling suggests $7 in earnings per share is doable by 2030.
A 20-times forward multiple on that implies a 2029 price target for Vroom stock of $140. Discounted back by 8.5% per year, that implies a fair 2020 price target for Vroom stock of almost $70.
Bottom Line on VRM Stock
Vroom stock is a long-term winner that is being unfairly punished amid recent indiscriminate selling across the entire technology sector.
Ignore this noise. Embrace the weakness. Buy the dip. The fundamentals remain rock solid. The long-term growth prospects remain promising. And the stock is now undervalued.
Dip buyers here will be rewarded handsomely, both over the next 10 months and 10 years.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.
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