Should you buy the dip in Vroom (NASDAQ:VRM) stock? After it went public back in June, investors couldn’t get enough of Vroom stock. The online used car dealer saw its shares rally from an IPO price of $22 per share, to prices topping $60 per share on July 6. But now, those who bought in early have taken profits, and shares have dipped to around $45 per share.
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That doesn’t mean the party’s necessarily over for this budding Carvana (NYSE:CVNA) competitor. Trends continue to be on the side of automotive e-commerce plays. With analysts projecting around 91% sales growth between this year and the next, you can’t deny this company’s long-term growth potential.
On the other hand, kicking the tires of Vroom stock, there are key risks to consider. Namely, the recent resiliency in the used car space could turn negative again. This may impact this company’s ability to live up to its current sky-high expectations.
In short, it may not be best to dive into shares right now. But at a lower price, it could be a great long-term opportunity. Let’s dive in, and see why a “wait-and-see” approach is the best way to play this rising used car industry disruptor.
Does the Current Environment Help or Hurt Vroom Stock?
Today’s stock market is a strange place. It’s almost as if the Great Recession and the Dot Com Bubble are happening at the same time! On one hand, you have high unemployment and a recessionary enviornment. Many hard-hit industries (airlines, retail) remain in the red due to lockdowns.
On the other hand, the outbreak-driven “stay-at-home” economy has created numerous tailwinds for tech and tech-related stocks. It seems every day the NASDAQ 100 (NASDAQ:QQQ) sets new highs. Blue chip tech names like Microsoft (NASDAQ:MSFT) are more valuable than ever. And emerging tech giants like Shopify (NYSE:SHOP) have seen their shares appreciate more rapidly than in prior years.
What does this mean for Vroom stock? Its hard to tell. At first glance, it’s easy to argue that this company, like Shopify and the other “stay-at-home” stocks, can continue to crush it. Not only because of the tailwinds created by the “new normal.”
As InvestorPlace’s Josh Enomoto wrote on June 19, online car shopping means less hassle and confrontation, and greater convenience, than “analog” car shopping.
This bodes well long-term for this company and its online auto dealer peers. As one Seeking Alpha commentator noted, used car sales only have an e-commerce penetration of 0.9%. Considering that over 40 million used cars are sold each year, that means massive growth opportunity for both Vroom and Carvana.
Yet, Vroom’s near-term success is no slam dunk. Sure, the pandemic may be helping to accelerate the move of used car sales from in-store to online, but troubles for the industry may be on the horizon.
Why Things Could Turn on a Dime
The pandemic materially affected new car sales. But, based on June numbers, things haven’t been as bad for the used car space. According to auto industry research firm J.D. Power, used car sales rose 17% above “pre-pandemic forecasts” last month.
This sounds like a tailwind for Vroom, yet this seemingly rapid comeback may be short lived. Why? Firstly, stimulus checks and enhanced unemployment benefits likely bolstered consumer spending during these tough times. What happens if a second round of stimulus checks doesn’t happen, and/or boosted unemployment checks come to an end?
Secondly, a used car glut could be just around the corner. Between rental car companies unloading fleets and consumers returning leased vehicles to dealers, supply may soon exceed demand.
This could put downward pressure on the company’s already-thin gross margins. And considering the company is losing millions as it scales up, Vroom may need to raise more cash to remain on the growth train.
In other words, future dilutive equity offerings are a possibility, which could minimize potential long-term gains in this stock.
Simply put, you can argue that the risk/return for Vroom stock may not be in your favor right now. Yet, if the aforementioned risks come to fruition, shares could fall further from today’s prices, creating a solid entry point for a long-term position.
Take Your Time Before Hopping into Vroom Stock
I’m not denying there’s opportunity with this automotive e-commerce play. With long-term trends on its side, this company can easily live up to its sky-high growth expectations.
Yet, today’s valuation leaves little room for error. If potential challenges hit the currently-resilient used car industry, the stock could fall far below the current price range (between $45 and $50 per share).
So, what’s the call? Keep Vroom stock on your radar, but sit on the sidelines for now.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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