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Bad fundamentals, not just market conditions, have played a role in Vroom’s (VRM) big price decline.
A cooling used car market will worsen its situation.
Larger peers may be able to ride out a used car market slowdown, but for Vroom, it could be a “game over” moment.
Source: Lori Butcher / Shutterstock.com
In recent weeks, shares of online used car buying platform Vroom (NASDAQ:VRM) have continued to plunge. VRM stock has dropped nearly 40% in the past month alone and 93% over the past six months. Compared to its all-time high of $73.87 per share set in 2020, it’s down more than 98%.
I can see why you may want to go against the grain and enter a position today. Even a slight improvement in investor sentiment for shares could result in outsized returns. Yet, while a triple-digit rebound is possible in theory, whether it is probable is another question.
It’s not only changing market conditions that have beaten down Vroom so far from its high water mark. Deterioration of its fundamentals has played a big role, as well. Now add in the prospect of further challenges ahead as the used car market cools. Taking a hard pass on it is your best course of action.
VRM Stock has Been a Lemon of an Investment
Used car stocks, as well as growth stocks, have performed poorly since late last year. With this, it’s not surprising why Vroom shares have taken such a dive. Concerns are on the rise that the “bubble” that emerged in used cars, due to supply chain headwinds like the chip shortage, has peaked.
Growth stocks have dropped significantly since the Federal Reserve began its efforts to fight high inflation through interest rate increases. Higher rates means a lower present value for growth stocks, which are valued on future earnings. Still, this doesn’t fully explain why VRM stock, even among similar plays, has experienced a larger decline in price.
So, what’s behind this? Its severe profitability problem. This was an issue when the used car bubble was in full swing and is an even greater concern today. Even as it saw its sales more than double during 2021 — a banner year for used car sales — net losses soared by a large, albeit lesser, amount.
It could eventually grow to a level where it can cover fixed costs and get out of the red. What’s the problem there? With an industry slowdown on the horizon, achieving such growth is questionable.
Bad News for Vroom if Used Car Market Cools Down
It may still seem like a seller’s market when it comes to used cars, as supplies remain limited. However, things may be changing. As used cars become unaffordable, buyer hesitancy is on the rise. This explains why the number of retail used vehicle sales, not just prices, fell during April.
If this is the start of a cool down in used car demand, the impact on Vroom could be substantial. Waning demand will make it difficult for the company to continue its current pace of revenue growth. With that, there are dimming chances that it is able to narrow losses. For reference, it has reported net losses of $370.9 million over the past twelve months.
Worse yet, as InvestorPlace’s Ian Bezek discussed in his Apr. 29 article on VRM stock, the company generated just $473 in gross profit per vehicle sold. If demand, and therefore, prices, continue to fall, these already-slim margins could thin out further.
For now, Vroom appears well equipped to ride out these losses, given its $1.13 billion cash position. Even so, greater-than-expected cash burn could mean a large chunk of this cash flies out the door over the next twelve months.
Bottom Line on VRM Stock
With 34.93% of its outstanding float sold short, despite the many discouraging signs, you may still be finding this stock to be an appealing opportunity. This high short interest could amplify a potential rebound if Vroom’s situation were to improve.
However, when talking about a comeback or recovery, “if” is the keyword here. There’s a lot more pointing to the situation getting worse than better. Operating with slim gross margins and high losses during boom times for used car sales, you can imagine how bad its operating performance will be in an industry downturn.
This company currently earns an “F” in my Portfolio Grader. Pardon the pun, but any way you slice it, VRM stock is a lemon. The only difference now, unlike last year, is that instead of paying full sticker, you are getting it at its “as is” price.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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