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Vroom: I Am Hitting The Brakes

Jun. 09, 2020 3:45 PM ETVroom, Inc. (VRM) StockCARS, CVNA14 Comments


  • Vroom has gone public and after strong pricing process, shares doubled on their opening day.
  • While a 3 times annualised sales multiple looks reasonable, note that this is a low margin business, which is burning a lot of cash in the meantime.
  • I recognize the potential for e-commerce in the used car market, yet investors are (too) eager to extrapolate potential from here.
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Vroom (NASDAQ:VRM) is another online used car e-commerce platform aiming to disrupt one of the largest US industries, with so far Carvana (CVNA) being one of the few winners in this area.

The company is looking to benefit from the same market with e-commerce penetration of this huge and tricky market still coming in below or at around 1%. This potential is very encouraging, yet the losses incurred in the near term are very high as it is the question of how and how much money such a business can make. The numbers reported by Vroom currently are not convincing to me.

The Business - Helping People Find Their Drive

The header of this paragraph is the mission of Vroom as it simply aims to create a better way to both buy and sell vehicles. The company reveals that the market for used vehicles totals more than $800 billion in 2019, comprised out of some 40 million units being sold, with e-commerce penetration being less than a percent. The potential market is huge. Not only is the market larger than new auto sales, it furthermore is larger than the grocery industry, and despite the size of the market, the penetration of less than a percent is far smaller than other industries. On average, e-commerce penetration in retail industries comes in around mid-teens.

The company is an e-commerce platform which allows for a personalized interface, in contrast to peer-to-peer platforms and notably legacy dealers. The company relies largely on data science and experimentation to run its operations, used in both buying cars from consumers and selling to them. This has real implications for the business as this requires inventory and thus pricing risks as well, making the company not just a platform, yet actually a business which relies on inventory levels as well, thereby requiring quite some capital

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Comments (14)

Low margin cash consuming business. I sold my allotment yesterday at $ 45.

Today I compared it to CVNA. CVNA is a real dog compared to VRM....looking to short CVNA if it pops.
yazzer profile picture
you look like you left a ton of $$$ on the table here.
Looking at how long the share price of CVNA has been irrational, I suspect that many early buyers of the stock are looking for a similar ride with VRM. After all, how hard is it to sell $1 bills for $0.80?

Moreover, the market seems to reward these zombie companies with ample opportunities to return to the market to fund their ever losing business models. It will end badly for most, but will be great for the insiders during the run up.
Rodney Beasley profile picture
I would have much rather saw the trends per car laid out, VRM vs CVNA. I am also going to bet that VRM mgmt is more trustworthy than CVNA. Just a little hunch I have.
polymath ryan profile picture
Blows my mind people buy cars through e commerce. How do they make a significant investment in a car without test driving, negotiating finance or finding their own car loan, and negotiating the price or asking for a few oil changes etc...
poly; LAZY
People buy collector cars on e commerce auction
@THE Value Investor, You need to edit your article to reflect the proper valuation of VRM vs CVNA. Your enterprise value on CVNA is way off! See below.
@The Value Investor

CVNA share count.

Does everyone realize with Class A and B shares and incentive shares this is approaching 200 million.

The number of shares of Class A common stock to be outstanding following this offering is based on 64,159,955 shares of Class A common stock outstanding as of May 15, 2020, and unless otherwise indicated, all information in this prospectus:

excludes the shares of Class A common stock that may be issuable upon exercise of redemption and exchange rights held by the LLC Unitholders;

excludes 9.8 million shares of Class A common stock reserved for future issuance under our 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) as of May 15, 2020, after considering granted and forfeited awards;

excludes 1.3 million shares of Class A common stock issuable upon exercise of options outstanding as of May 15, 2020 with an average exercise price of $38.62 per share;

excludes 0.9 million shares of Class A common stock issuable upon vesting and settlement of restricted stock units outstanding as of May 15, 2020; and

assumes total net exchangeable outstanding LLC Units of 131.4 million held by LLC Unitholders other than Carvana Sub, including 126.7 million Class A Units and 4.7 million net exchangeable Class B
The Value Investor profile picture
Thanks for pointing out. Let me look into that.
disla68 profile picture
At 40 plus dollars it's way too expensive at the moment... You can buy Uber for that same price.
Vrooms annual gross receipts was 900 million... Uber was 18 billion... Hmm??

At $20 a share it was somewhat appetizing... But 40+ right off the shoot... that's crazy.
@disla68 VRM IPO was for 18.75 Million shares. UBER has between 1.7 to 1.9 Billion shares outstanding. I'm not sure the share price is an apples to apple comparison.
yazzer profile picture
the IPO was 18.75M but the outstanding shares are 115M+. Your point is good but you also made an apples-to-apples error!
@yazzer I get your point. I couldn't figure out how many shares where subject to lock up restrictions so the amount shares ricocheting around the market right now is a bit nebulous. I just knew it was less than 1.9 billion.
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