What happened
Shares of Vroom (NASDAQ:VRM), the newest used-car buying online platform to go public, is leaving the markets in the dust Tuesday, as its stock soared as much as 115% higher in its market debut.
So what
Hindsight is 20/20, but the high demand in Vroom's Initial Public Offering (IPO) was easy to predict, considering the compelling growth story -- especially as the company closely resembles Carvana (CVNA +2.71%), which has obliterated market returns with a meteoric 775% rise over the past three years. Vroom priced its IPO late Monday at $22 per share, up from its previous range of $18 to $20 per share, and it jumped over $47 per share during intraday trading.
The coronavirus pandemic has been unquestionably tragic and has crushed transportation and automotive stocks. Vroom and Carvana, however, are uniquely positioned to thrive not only during the pandemic, but also during its aftermath, as the past few months have accelerated the way people use the internet for major purchases such as used vehicles. Vroom and Carvana are able to offer online purchases, a wider vehicle selection, and contactless vehicle deliveries.
Those factors are why Carvana has rebounded far more quickly than the broader auto industry, which is illustrated in the graph above. It's likely also the reason Vroom soared Tuesday in its IPO.
Image source: Getty Images.
Now what
Vroom was positioned to thrive amid the coronavirus pandemic compared to traditional dealers, but that doesn't mean the company hasn't felt the impact. Vroom cut vehicle prices to drive sales and halted acquisitions temporarily to balance inventory during the pandemic. The strategy was successful, but also hurt the company's margins, which it will try to offset by buying higher-demand models that are holding better pricing.
There's plenty of room for a Carvana competitor in the highly fractured and massive used-vehicle industry, but Vroom has yet to turn a profit and acknowledges it'll continue to take losses as it invests in growing its young business. Vroom has an intriguing long-term growth story, and if its stock continues on the same path as Carvana, its investors will be well rewarded. However, they need to be aware of the volatility and high-risk, high-reward nature of this investment.
