Vroom Is Another Case Of Excellent Isn’t Good Enough
Vroom (NASDAQ:VRM) emerged as a pandemic-winner over the summer for a couple of reasons including:
- strong eCommerce trends and
- strong used-car trends.
Those trends have produced some strong growth for the company but there is one thing wrong. The market was expecting more, a lot more, and when the market doesn’t get what it wants stock prices tend to fall. Now though, shares prices have hit their lowest levels since the IPO and showing signs of over-extension … and the outlook for growth is still as strong as it ever was.
Vroom Sees Sequential Improvements, Guides Weak
Vroom’s revenue fell a little more than 5.0% over the course of the last year but there is a mitigating factor to be aware of. It’s the only bad news in the report and due to a decline in TDA sales. TDA sales or Texas Direct Auto is the company’s only physical sales location. Sales at this outlet fell 37% over the last year and account for only 15% of the company’s 3rd quarter revenue. That said, revenue beat the consensus by 375 basis points and grew 27% from the prior quarter. Sales were underpinned by a robust increase in eCommerce that is expected to carry into the 4th quarter.
“After the initial disruption in our ecommerce operations due to the COVID-19 pandemic, consumer demand for used vehicles has returned to pre-COVID-19 levels and, in the three months ended September 30, 2020, we experienced continued strong consumer demand for our ecommerce solutions and contact-free delivery.”
eCommerce sales at Vroom increased 59% on a unit-basis and 120% in terms of profits. Profits were boosted by the combined impact of unit increase and profit increases that are expected to stick in future quarters. Unit increases are attributed to the company’s expansion plans as well as strong consumer trends within the used and pre-owned car market. Looking forward, company execs are expecting demand to increase over the course of the 4th quarter.
The guidance is bullish but again nothing more than the market was already expecting. The company projects 10,500 to 11,500 in unit sales or 25% sequential and 75% YOY growth. TDA sales are expected in the range of 1,400 to 1,600 units. Total revenue is expected in the range of $372 to $414 million which brackets the consensus of $401 and the consensus is above the midpoint.
Vroom Shares Fall, Analysts Lower Their Price Targets
Vroom reported a solid quarter but the less-than-expected guidance for the 4th quarter sparked a flurry of lowered price targets. Bank of America analysts said:
"We are encouraged with Vroom's ability to accelerate GPPU expansion and see above Street 4Q GPPU guidance as indicative of steady progress towards profitability. While below Street unit growth guidance in 4Q raises execution concern we see a long growth runway ahead of Vroom …”.
The consensus target is near $61 which implies a near 70% upside for the stock.
Looking at the chart, shares of Vroom are sitting at the lowest levels since the IPO but showing signs of support. The stock gapped lower on the 3Q news but buyers stepped in to drive prices up and off the opening lows. The indicators remain weak but show growing indications of support with divergence and bullish crossovers. Price action may fall a bit more from this level but I wouldn’t be surprised if this is the bottom. With competitor Carvana trading at 3.5X revenue and Vroom a mere 1X revenue there is a real opportunity for multiple expansion as well as growth.
