Vroom Readies For IPO, With A Reasonable Valuation
Summary
- Rapidly growing used car platform is getting ready for an IPO.
- Not all revenue is the same. TDA is a physical property, which has little or nothing to do with its ecommerce revenues.
- Vroom's IPO valuation will come in at 1x sales, thus making it in no way irrationally priced.
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Investment Thesis
Vroom (NASDAQ:VRM) is growing its revenues at a breakneck pace. The company is likely to end up being priced at close to a $2 billion market cap. On the one hand, I question just how much of its revenues are growing rapidly, noting that TDA has little to do with its ecommerce revenues.
On the other hand, given that its IPO puts the company's valuation at approximately 1x forward sales, this implies that it is not expensive in today's market.
What Does Vroom Do?
Vroom is an online platform for selling used vehicles. The company positions itself amidst the highly fragmented used car market, claiming that used is the 'new' new. Its carrot for investors is that it's a high growth opportunity:
Source: Author's calculations, investor prospectus
For the year ended 2019, its revenues were $1.2 billion, and its Q1 2020 revenues reached $376 million.
Given that Q1 2020 saw its revenues increase by 60%, it would not be unreasonable to estimate that Vroom's 2020 revenues could minimally reach $1.8 billion.
Post-IPO It Will Have A Very Strong Balance Sheet
As for its balance sheet, it's clean, with no 'nasty' surprises. Post-IPO proceeds of $275 million makes Vroom close to debt-free, and with total cash and equivalents of approximately $445 million.
How Important Are Each Of Its Segments?
In the graphic below we can see that as of the end of March 2020, ecommerce accounted for approximately 62% of total revenue.
Source: Author's calculations
Furthermore, you can see that a quarter of its revenues are derived from TDA. Back in December 2015, Vroom acquired Houston-based Texas Direct Auto (“TDA”), which is a physical location that has nothing to do with its ecommerce operations.
Consequently, even if it does not add to the 'ecommerce' narrative, it adds to sales. For now, management will do all it can to point to its total revenues, while at the same time, pointing towards its rapidly accelerating ecommerce opportunity. Investors should be wary.
(Source)
Above, within the red box, you can see that in 2019, before COVID-19 was an issue, this physical segment's sales were already stagnating, with less than 3% year-over-year growth. Put another way, Vroom's strongest opportunities is derived from its ecommerce segment, even though this segment only accounts for two-thirds of its revenues.
On the other hand, its ecommerce segment is certainly reporting strong and accelerating growth rates:
Moreover, not only has ecommerce revenue grown with a 77.0% CAGR from 2016 to 2019, but from 2018 to 2019 it went on to grow at 95.3% year-over-year - thereby showing stable and rapid growth.
Valuation - Reasonably-Priced IPO
Vroom will have 112.7 million shares (or 115.5 million shares, if the underwriters exercise their over-allotment option in full). Given that Vroom is looking to price at the high at $17 per share, this implies its market cap will be just shy of $2 billion.
Considering the narrative of ecommerce, and positioning itself as a 'low-touch' company, together with strong growth, in the present market, I would not be surprised to see its P/sales expanding from 1x forward to 2x forward.
Investment Risk
The main investment risk is the question mark over how sustainable these growth rates are? Investors paying up $2 billion for Vroom should consider that Vroom has no significant competitive advantage. Competition exists amongst large, national car dealers, Carvana (CVNA), CarGurus (CARG) and peer-to-peer market (think Facebook (FB), Craigslist.com, and countless others).
The Bottom Line
On the one hand, being valued at close to 1x sales, it is not expensive. On the other hand, I have reservations over whether its growth rates are sustainable long term, given the myriad of competition already in this sector.
Next, its most attractive segment is its ecommerce revenues, but this finished 2019 at less than $600 million and just accounted for approximately 62% of total revenues.
However, given the animal spirits Vroom will IPO into, for now, investors will give this company a wide path and most likely chase it higher.
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