VRM - Should You Buy the Dip in an Online Used-Car Seller Vroom?

The online used-car seller Vroom Inc. (VRM) went public in June 2020 but has been struggling to generate impressive returns. The stock has lost 44.9% over the past six months. Because people have been  wary of travelling in crowded public transport amid the pandemic, the demand for private transport has  increased. However, due to constraints in sales and sales support personnel, VRM has faced difficulties in meeting the market demand.

Also, consumers’ demand for  car purchasing through  e-commerce platforms provided by companies such as VRM is lower than the demand to do so from physical outlets. This is because  consumers prefer to see cars physically and to test drive them before making a purchase.  VRM also lost 33.6% since announcing disappointing fourth quarter (ended December 31, 2020) results on March 3, 2021.

Here are the factors that I think could influence VRM’s performance in the coming months:

Slow Adoption of Used-Car E-Commerce Platform

The COVID-19 pandemic has accelerated the use of most  e-commerce platforms as people found themselves stuck at home.  However, the e-commerce platform operated by VRM is not like most others: it offers buying and selling of used cars, which is often an involved purchase decision.  For example, it is difficult to understand the performance or comfort of a vehicle by just looking at its details online. As a result, people are hesitant about  buying used cars from online platforms like VRM.

Ongoing Investigation

Glancy Prongay & Murray LLP, which is a leading national shareholder rights law firm, announced on March 5that it has commenced an investigation on behalf of the investors of VRM regarding  its possible violations of  federal securities laws. So, the company’s  prospects may  depend to a degree on the results of the investigation.

Weak Financials

For the fourth quarter, ended December 31, 2020, VRM highlighted its e-commerce revenue growth of 43.1% year-over-year to $284.95 million. However, the company’s loss from operations was t $59.38 million for the quarter, and its net loss came was  $60.66 million. Moreover, VRM’s  non-GAAP net loss per share was  $0.44 for the quarter compared to loss per share of $0.31 for the third quarter, ended September 30, 2020.

POWR Ratings Are in Sync with VRM’s Bleak Outlook

VRM has an overall rating of F, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these  categories, VRM has an F  grade for Quality also.  This is consistent with the stock’s trailing-12-month gross profit margin of 5.3%, which is much lower than the industry average 33.7%.

The stock has a grade of D for Sentiment in sync with pessimistic analyst estimates.

Click here to access VRM’s grades for Growth, Stability, Momentum and Value as well.

VRM is ranked #37 of 38 stocks in the Specialty Retailers industry.

Better than VRM: Click here to access 13 top-rated stocks in the same industry.

Bottom Line

VRM has been struggling to generate returns relying on its existing business model. Moreover, because the company went public last year, it is expected to spend much more on advertising and marketing to promote its brand. As a result, it is uncertain if the company will be able to rebound in the near term and generate income. So, we think it  wise to avoid the stock for now and wait and see how the factors discussed here pan out for the company.

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VRM shares were trading at $32.83 per share on Monday afternoon, up $0.86 (+2.69%). Year-to-date, VRM has declined -19.87%, versus a 3.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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