Vroom Stock Forecast

Vroom Stock Forecast: Vroom, Inc. is an online platform used for buying and selling second-hand cars in the United States.

The company is committed to making the sales experience convenient and easy, with lower prices, better warranties, and no need to haggle over the fine print. They’ll even ship the car to you at no extra cost. 

Is Vroom Stock A Buy?

Vroom didn’t have a great fourth quarter in 2020, with the firm missing its earnings-per-share expectations, and only narrowly beating analyst’s revenue forecasts. However, the company turned things round this time, and its first quarter results for fiscal 2021 were much improved.

Revenue increased 57% year-on year from $74.2 million to $591 million, and its Non-GAAP EPS of -$0.57 beat by $0.05. Its e-commerce platform saw 15,504 units sold – a 96% increase year-on-year – making a gross profit increase of 123% at $31.8 million.

Other highlights for the quarter included Vroom’s acquisition of the AI-powered vehicle information business CarStory, and an increase in total wholesale units sold.

The Business Model

Vroom isn’t actually a peer-to-peer marketplace; the company itself buys and sells on automobiles, refurbishing and reconditioned them in the process.

Looked at this way, Vroom’s business is really one of arbitrage, with its profit ultimately lying in the space between the purchase prices it pays for the cars it sources, and the retail price – minus expenses – it makes in return.

True, this might not seem much different from any other enterprise, but for Vroom this means that its unit economics are essentially the be-all and end-all of its business.

Interestingly, the gross profit Vroom made on each vehicle sale in 2020 actually went down because of poor selling margins, although its total gross profits in the vehicle e-commerce segment grew 42.6% because of increased numbers of cars sold. However, better-than-expected growth in financing and warranty profits meant that its profits in the total e-commerce sector went up by 89.4%.

This isn’t particularly reassuring. Add-on sales like warranties and insurance products will always be good profit drivers, but declining margins on actual vehicle sales is a worrying development.

That said, Vroom’s purchase of CarStory could make a telling difference here. CarStory analyses market data for the used-car industry, and leverages AI-enabled technology to generate data science insights into a vast number of key market metrics.

Vroom will use this data to manage its inventory and inform it on the best way to optimize purchase and sales strategy. Superior pricing algorithms and predictive market data should give Vroom the edge it needs in a sometimes complicated and opaque arena.

Financial Health

Based on some important financial multiples, Vroom stock looks to offer a solid buying opportunity.

Its forward Price/Sales ratio is low at just 2.24, and its future revenue growth is reckoned to be 51.6% for the next two years.

Additionally, the company also ended the quarter with more than $950 million in cash on its books, enough to fuel expansion projects and smooth over any untoward issues that might crop up in the near future.

Risks of Buying Vroom Stock

Vroom isn’t the only player in the game when it comes to online vehicle retailing. Carvana, another internet-based car sales platform, is also disrupting the space – and was once dubbed the fastest growing used-car company in the US.

Whether Carvana (CVNA) – or any other rival – can out-compete Vroom in the sector is paramount to Vroom’s future success. However, the total addressable market for the used-car industry in 2021 is around $153 billion, and Vroom takes about $1.35 billion of that. This implies a market share of less than 1% – which isn’t too large and leaves a lot of room for manoeuvre with other companies.

Even so, perhaps the most pressing concern for Vroom at present is the apparent historical volatility of used-car prices. During the recent COVID-19 panic, for instance, second-hand vehicle valuations went sky high, often pricing some potential buyers out the market. There were compounding factors here as well, as car manufacturing dried up because of locked-down plants and stay-at-home work crews. 

But car prices are subject to strong depreciation too, and an adverse downward shift in retail tickets could really hurt Vroom. Indeed, a stagnant inventory turn at a time of dropping prices could be disastrous for the firm.

Vroom Stock Forecast: The Bottom Line

The used-car market is big business, with current estimates predicting the industry will be worth more than $885 billion by 2026.

Demand for pre-owned vehicles is also high at the moment; consumer habits have changed since the onset of the coronavirus pandemic, and the economic squeeze many households are feeling right now has seen new buyers turn away from expensive new-build automobiles.

Traditionally, second-hand car sales were normally handled face-to-face through regional dealerships or by advertisements in local press outlets. However, that is changing. Online e-commerce retailers like Vroom are starting to make inroads into this business model – and customers seem to like it.

But the question remains; will these new upstarts prevail in the long run over an industry that shows strong sticking power even in the face of the digital economy?

For now though, Vroom is in a commanding position. It trades on a discount compared to its chief competitors, and through its buy-out of CarStory is leveraging AI-derived data to put it ahead of the pack.

Its share price is off by at least 10% of its 2021 highs, and now might be a good time to accumulate more – or just start a position in this very enticing stock.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.