After a pause during the COVID-19 lockdowns, the IPO market is heating up again, and a smashing debut from Vroom (VRM +0.00%) Tuesday proved investors are hungry for new issues.
Shares of the online used car seller skyrocketed on opening day, more than doubling from its $22 IPO price, reaching a valuation around $5 billion. After seeing shares of fellow online car dealer Carvana (CVNA +0.91%) soar in recent years, investors are clearly excited for Vroom to hit the market. Should you take a ride with the used car debutante? Keep reading to see five things you need to know about the company before you decide whether to buy.
Image source: Vroom.
1. Vroom has a massive opportunity
The used car market is the single largest consumer product category in the U.S., making up $841 billion in annual sales last year, ahead of $683 billion in grocery sales and $636 billion in new car sales. In 2019, Americans bought about 40 million used cars.
The industry is also highly fragmented, making it ripe for disruption. Today, there are more than 42,000 dealers, millions of peer-to-peer transactions, and no single party owns more than 2% of the market. Brick-and-mortar chain Carmax is considered the market leader with nearly 2%. Consumers also dislike the traditional used car-buying experience , as 81% of respondents expressed dissatisfaction with the process in a survey from Dealersocket.
That sets up a great opportunity for online disruptors like Vroom, as the online used car market its expected to grow from just a 0.9% share of the total market currently, which is one of the lowest e-commerce penetration rate in a consumer category, to as much as 50% by 2030. If that forecast comes to fruition, Vroom will be looking at a $400 billion addressable market in just a decade, an appealing opportunity for a company that generated less than $1.2 billion in revenue in 2019.
2. Its core business is seeing triple-digit growth
Vroom's business is made up of three separate segments: e-commerce, Texas Direct Auto (TDA), and wholesale. TDA came to the business through a strategic acquisition in 2015 that gave the company its first vehicle recondition center as well as its only retail location. The wholesale business, meanwhile, is a byproduct of the e-commerce operations, as the company sells vehicles that aren't up to its standards to wholesale auction dealers.
The e-commerce business, built on its online marketplace of used car buyers and sellers, is the growth story. Though it made up slightly less than 50% of revenue last year, the e-commerce business will be the company's growth engine and should be 100% of investors' focus, since that's how the company is looking at the business' future.
In an interview, CFO Dave Jones explained that the company ramped up its marketing spending last April as it had the necessary inventory and technology in place to drive an acceleration in the business. Units sold on the e-commerce platform have more than doubled since then, and jumped 145% from April 2019 to April 2020. In the first quarter, average monthly visitors to the site jumped about 130% to 947,014, driving revenue in the first quarter up 159% to $233.2 million.
Considering the market opportunity and the strong demand, investors should expect the skyrocketing growth to continue.
3. There are some differences from Carvana
Jones said that Vroom has a lot of respect for Carvana, its larger e-commerce peer, and said from the customer perspective, the two businesses are similar, as both offer a streamlined process for buyers and sellers to handle used car transactions online. However, from an investor perspective, there are some key differences between Vroom and Carvana.
Vroom's business is centered around being asset-light, meaning the company owns relatively little property. That helps it keep fixed costs down and allows it to be financially flexible. Vroom only owns one of its vehicle reconditioning centers (VRC), which it acquired in the Texas Direct Auto deal, and has 13 third-party VRCs spread across the country. That allows Vroom to pass on some of the risks and costs to the operators who run those facilities. At the end of 2019, Vroom had just $7.8 million in property and equipment and generated nearly $1.2 billion in revenue.
By contrast, Carvana owns its reconditioning centers as well as the logistics network that brings cars to and from customers and its reconditioning centers, and its trademark vending machines. Carvana had $543.5 million in property and equipment at the end of 2019, and the company generated $3.4 billion in revenue.
Similarly, Vroom outsources financing for car buyers to partner banks and lenders, while Carvana provides loans itself and sells the loans to financing partners.
Being asset-light isn't necessarily an advantage, since doing so means Vroom may lose the potential to generate profits from the parts of the business it outsources. However, it does make the company more financially flexible and avoids some of the risk in owning hundreds of millions of dollars worth of support systems as well as the responsibility for the fixed costs that go along with them.
4. COVID-19 has been a tailwind
Like other e-commerce businesses, Vroom has seen a surge of interest during the pandemic and lockdown period, and third-party data backs up that trend. According to a survey from CarGurus, 61% of respondents would now consider shopping for a vehicle online. Before the crisis, that figure was just 32%.
If that pattern persists even when the pandemic is over, it could be a huge driver of Vroom's growth, because one of the biggest obstacles the company faces is simply getting consumers to consider buying or selling a car online. The impact of the pandemic, shutdown orders, and social distancing that have ensued is doing that work, marketing the idea of online car buying and selling, by itself.
Jones said Vroom's sales continued to surge in April and May, which were record months for the company as the desire to own a vehicle also seems to have increased due to fears of the virus. Those fears have led Americans to avoid public transit, airplanes, and ridesharing vehicles.
Finally, the pandemic could also provide a boost on the supply side -- which has historically been short of demand at Vroom -- as rental car companies are likely to accelerate fleet sales given that demand for rental cars has plunged during the pandemic.
5. Vroom has an eye on profitability
Like Carvana, Vroom isn't profitable. In 2019, the company had a generally accepted accounting principles (GAAP) net loss of $143 million.
Vehicles sold through its e-commerce business increased from 10,006 in 2018 to 18,945. Growth was even stronger in the first quarter, rising from 3,187 vehicles sold in the first three months of 2019 to 7,930 in the first quarter this year.
Jones said the business model was scalable, and that the company believes it will be profitable once it reaches 200,000 vehicles sold annually. If unit sales continue to roughly double, the company could reach that target in as soon as three to five years.
Still, top-line growth is the key figure to watch here. Vroom is tackling a massive market opportunity, and the company is just getting started with its e-commerce business, firing up the marketing to support demand and awareness only a year ago.
With a huge market awaiting it and triple-digit growth, it's clear why investors are excited about this e-commerce disruptor.
