Vroom IPO: 5 things to know about the online used-car seller

Jun 9, 2020

Online used-car seller Vroom Inc. is aiming to raise around $467 million in an initial public offering under the shadow of the coronavirus pandemic.

Vroom could benefit from the broader shift to online shopping accelerated by the pandemic. With the economic uncertainty and turmoil in the car industry, however, its business model could become more challenging. Vroom already has had to cut prices and its profit margins have shrunk.

“The market is placing a high value on next-generation companies that can thrive in a post-COVID economy," said Matthew Kennedy, a senior IPO market strategist with Renaissance Capital, which manages IPO-focused ETFs. “Vroom falls into that category.”

Car dealerships are under pressure as consumers both delay big-ticket purchases and limit non-essential travel, if the dealerships are open at all, Kennedy said.

“However, tech-focused used car platforms like Vroom proved more resilient. Consumers are increasingly interested in shopping online for cars, and the COVID-19 outbreak (has) accelerated that trend.”

Kennedy points to the success of Carvana Co. shares, which have rebounded since March, when most of the U.S. went under shelter-in-place, public-health orders to slow the spread of the virus. Shares of Carvana, Vroom’s main competitor, are trading more than 600% above the company’s 2017 IPO price.

“That alone could drive interest in Vroom,” he said.

The IPO market has shown more activity in recent weeks, with the biggest deal of the year pricing at the higher end of its price range. Warner Music Group Corp. returned to public markets on Wednesday after nine years as a private company, raising $1.93 billion.

According to Renaissance, 35 IPOs have priced in 2020, a 42% drop so far from last year.

Here are five things to know about Vroom.


1) IPO terms suggest valuation of nearly $2.5 billion

Vroom late Monday priced its IPO at $22 a share, above its previous range of $18-$20. The company is offering about 12.25 million shares, for a market capitalization of around $2.48 billion.

Vroom is expected to begin trading Tuesday on the Nasdaq under the ticker symbol VRM.

Underwriters include Goldman Sachs, BofA Securities, and Allen & Co. The underwriters have a 30-day over-allotment option to buy up to 3.2 million additional Vroom shares.

Vroom is led by Paul Hennessy, who previously was Priceline.com chief executive and chief marketing officer of Booking.com, both owned by Booking Holdings Inc. Hennessy was named Vroom’s CEO in 2016.


2) Coronavirus impact

Despite the focus on online sales, Vroom was not immune to pandemic-related declines in business.

“The COVID-19 pandemic has impacted us in a number of ways, including an adverse impact on our e-commerce operations,” Vroom said in its prospectus.

Between March 11 and March 31, as most U.S. residents were told to remain indoors and nonessential businesses closed, online sales fell 15% as compared to the 20 days before March 11, the company said.

Starting in late March, Vroom cut vehicle prices to drive sales and quickly reduce inventory bought before the pandemic, and it also halted all vehicle acquisitions other than trade-ins, it said.

The strategy has worked, the company claimed, saying it “significantly” reduced inventory and, due to the price cuts, “our demand returned to pre-COVID-19 levels, and we experienced robust e-commerce vehicle sales.”

That came at a price, however: “Those sales were at a greatly reduced gross profit per unit, the company said.

Vroom has since resumed buying cars from auctions and individuals, but is focusing on “high-demand models” to get better margins, it said. Vroom plans to build up inventory “in the near term to return to and ultimately exceed pre-COVID-19 levels.”

To protect its balance sheet amid the pandemic, Vroom said it had reduced costs and furloughed about a third of its workforce in early May.

About 60% of the furloughed employees returned to work by the end of May, the company said. As of late April, Vroom had $156.4 million in cash and cash equivalents and $280.8 million available under its credit facility.


3) It has not turned a profit yet

Vroom has not been profitable since its start in 2012 and deficits have piled on to about $616 million as of March 31, the company said. In addition, losses have widened this year and dividends are nowhere in sight.

Net losses hit $143 million in 2019 and $41.1 million in the first quarter, compared with losses of $85.2 million for 2018 and $27.1 million in the first quarter of 2019, Vroom said.

Revenue rose 39% to $1.2 billion in 2019. For the three months ended March 31, sales rose 60% to $375.8 million, Vroom said.

Its long list of potential pitfalls, or risk factors, include “inability to reduce costs, acquire and appropriately price vehicle inventory, attract customers or identify and respond to emerging trends in the used car industry; slowing demand for used vehicles and our related value-added products; weakness in the automotive retail industry generally,” as well as increasing competition.

Vroom expects “to continue to incur losses as we invest in and strive to grow our business,” it said. It has to ramp up expenses with advertising and marketing as it builds its brand, continues to invest in technology, and expands. Being public will also come at a higher cost, as it will have to face “significant” legal, accounting and other expenses that it did not incur as a private company.

E-commerce gross profit per vehicle declined 24% last year as compared with 2018, and by 0.4% for the first quarter as compared with first quarter of 2019. “To reduce our losses, we will need to increase our gross profit per unit by lowering our costs per unit by, among other things, increasing efficiencies in reconditioning and logistics, which we may be unable to do,” it said.

Vroom also has said it does not expect to pay any dividends “for the foreseeable future.”


4) People may not be ready to give online car-shopping a try

The online market for used cars is a lot smaller than online markets for other consumer products.

One of the biggest hurdles is misgivings about buying a vehicle, usually a consumer’s largest one-time expense after buying a home or saving for a down payment, sight unseen.

Even often-derided interactions with car salespeople might be preferable for some, as is the ability to test-drive and examine the vehicles under consideration. Then there’s the inconvenience with returning or exchanging cars bought online.

“If the online market for vehicles does not continue to develop and grow, our business will not grow and our business, financial condition and results of operations could be materially and adversely affected,” Vroom said.

On the plus side, Vroom offers consumers access to thousands of vehicles, ready for perusal at any time, with pricing and financing information readily available, the company said. Vroom’s cars come from auctions, consumers, dealers, and rental-car companies.

The used-car industry “is highly fragmented with over 42,000 dealers and millions of peer-to-peer transactions ... it also is ripe for disruption as an industry that is notorious for consumer dissatisfaction and has one of the lowest levels of e-commerce penetration at only 0.9%,” Vroom said.


5) It relies on several third parties

Vroom relies on several third-party companies to do the bulk of its job.

That include its customer-service team, which handles “the substantial majority” of inquiries, sales, purchases and financing of vehicles in Vroom’s business.

“Thus, the customer experience center is fundamental to the success of our business. As a result, the success of our business and our customer experience is partially dependent on a third party over which we have limited control,” the company said.

Some of its “reconditioning” business, or the sprucing up of vehicles before going on sale, is also handled by third parties in some cases, Vroom said.

Carvana Falls on Concerns Inventory Constraints May Limit Sales

August 5, 2020

(Bloomberg) -- Carvana Co. reported a rebound in sales and smaller-than-expected quarterly loss but warned that inventory constrants could put a damper on growth.

The used-car retailer sold 55,098 vehicles in the second quarter, up 25% from a year earlier. Total gross profit per unit came in slightly higher than expectations at $2,726, and revenue rose to $1.12 billion.

But the Phoenix-based company’s shares plunged as much as 12% after the close of regular trading after flagging that it has less than 6,000 vehicles available for purchase, the lowest since the third quarter of 2018.

“We believe our current inventory is meaningfully limiting sales, making growing inventory our top company priority,” Chief Executive Officer Ernie Garcia and Chief Financial Officer Mark Jenkins wrote in a letter to shareholders.

While revenue growth slowed and trailed estimates, Carvana painted a robust demand picture in its earnings release, saying that the second quarter “started at the peak of Covid-19 related economic disruption and ended with structural shifts in customer preferences leading to the strongest demand we have ever seen.”

Carvana’s whole business model is based on selling vehicles online and delivering those cars to customers’ doorsteps. While the company felt some early pain as the impacts of the pandemic took hold, the retailer’s offering is attracting consumers who are stuck at home, avoiding public transportation and shopping online.

The company expanded into 100 new markets in the second quarter and says it now serves 73.2% of the population, up from 68.7% three months earlier.

Supply, Not Demand, Takes the Wheel at Carvana

Aug. 6, 2020

Compared with some of its bricks-and-mortar peers, the e-commerce used-car seller Carvana faces an enviable problem: It has so much demand.

Carvana said Wednesday that its revenue for the quarter ended June 30 increased 13% from a year earlier, missing analyst forecasts by more than 4 percentage points. Carvana beat estimates on the bottom line, posting a smaller net loss than analysts expected, but the company’s shares were still down almost 4% in after-hours trading.

The miss on sales occurred mostly because of logistical constraints. At the onset of the coronavirus pandemic, the retailer suspended some purchasing operations and reduced capacity at facilities where it conducts car inspection and reconditioning, crimping its inventory.

“Over the immediate term we expect our sales volume to largely be dictated by our production capacity,” the company said in Wednesday’s letter to shareholders. Plus, Carvana’s pause on vehicle purchases meant it missed out on newer, higher-margin inventory. As a result, the 25% year-over-year increase in the number of cars sold to retail customers last quarter wasn’t fully reflected in revenue growth.

But the bad news was balanced out by a promising milestone: In July, Carvana bought more cars from customers than it sold to them. That is an exciting development because buying directly from customers is cheaper than doing so at auctions. It should also help provide a healthy supply of inventory to sell on the company’s new wholesale platform, CarvanaACCESS, which was launched in late June. Any cars that don’t meet Carvana’s retail selling standards will be put up for sale at the virtual wholesale auctions the company plans to host on the new platform.

For now, however, Carvana’s attention needs to be on making sure it hires quickly to ramp up its inspection centers, the main bottleneck. That could prove a challenge, as some of its nine facilities are located in areas that experienced recent coronavirus outbreaks, including Phoenix, Dallas and Atlanta.

Carvana has enjoyed a good run, rising 89% so far this year before Wednesday’s results. The second quarter serves as a good reminder that the company must still navigate some learning curves.

Vroom Stock Stalls Out as Used-Car Seller Posts Disappointing Quarter

March 1, 2022

Tight supplies and soaring prices for new cars continue to have ripple effects on the market for used vehicles, and the companies that sell them. A disastrous set of financial results from the online used-car company Vroom highlights the issue.

Used vehicles and parts are scarcer because consumers who can’t find new cars to buy at rational prices are holding on to their vehicles longer. Late Monday, Vroom said it lost 95 cents a share in the fourth quarter, wider than the Wall Street forecast at 77 cents, while gross profit per car sold dropped almost in half, to $473 from $878 a year ago. Vroom said the decline reflected higher acquisition costs for premium vehicles, plus higher reconditioning costs due to labor shortages and “elevated demand” at third-party reconditioning services.

The bigger-than-expected loss came even though revenue came in at $934.5 million, up 130% from a year ago, and ahead of the Street consensus forecast of $901.9 million. That includes $738.7 million from the company’s core e-commerce unit, up 159.2%. (The company also sells some cars wholesale and through more traditional retail outlets.) Vroom sold 21,243 cars through the e-commerce segment in the quarter, up 92.7% from a year earlier.

Compounding matters, Vroom sees first-quarter revenue of $875 million, well below the previous Street consensus at $1.04 billion. Management expects e-commerce unit sales in the 18,000 to 19,000 range.

Responding to the news, Wells Fargo analyst Zachary Fadem cut his rating on the stock to Equal Weight from Overweight, chopping his price target to $6, from $16. “We find our Vroom bull case increasingly difficult to defend,” he said in a research note. The sharp drop in gross profit per vehicle was “yet another operational misstep in a long series of forgettable results” since the company’s June 2020 initial public offering, he said.

“While we are admittedly (and embarrassingly) slow to see the writing on the wall, we believe the macro narrative is too difficult, operational hurdles appear too great, and long-term profit trajectory too uncertain to continue recommending shares,” Fadem said.

J.P. Morgan analyst Rajat Gupta, who has a Neutral rating on Vroom shares, said the company also missed Street estimates on earnings before interest, taxes, depreciation and amortization, with a loss of $120 million, exceeding the Street’s projection of a loss of $98 million. He sees little hopes for a near-term improvement in investor sentiment, given inconsistent execution, elevated spending levels and an outlook “that remains uncertain in a constrained labor and logistics environment.”