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Why Carvana and Vroom Shares Plunged 10% Thursday

By Daniel Miller - Updated Sep 3, 2020 at 4:50PM

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Take the online used-car retailers' decline today with a grain of salt. But should you be concerned long term?

What happened

Shares of Carvana (CVNA 5.96%), and Vroom (VRM 7.88%), two well-known online used-car platforms, declined over 10% Thursday as the broader markets were pounded. But is there more to be concerned about with these two car-selling stocks?

So what

The Dow Jones Industrial Average and Nasdaq plunged 2.8% and 5%, respectively, on Thursday as investors appeared to take some profits following a strong recovery since the late March coronavirus-fueled sell-off.

^DJI Chart

^DJI data by YCharts.

There wasn't a major trigger for the market declines Thursday, but it's easy to understand how the broader decline could tempt investors to take some profits with Carvana, since the online car-retailer's stock has soared in recent months. The company was incredibly well positioned to offer American consumers a way to avoid dealerships entirely and purchase and finance a vehicle from their living room (home delivery of the vehicle is a common option, to boot).

Vroom's stock had also soared over 54% since its June 9 initial public offering (IPO) before selling off over the past two days, but it's still beating the broader markets and the vast majority of automotive stocks.

One of Carvana's car vending machines.

A Carvana used-car vending machine. Image source: Carvana.

Now what

Sure, the broader market sell-off could trigger concern for investors, but it really shouldn't, at least not yet. This could be the beginning of a correction after months of markets powering higher, but for investors in Carvana and Vroom, there is much less to worry about. The two companies are very well set up for the current COVID-19 environment, or a potential second wave during the fall season. And the pandemic has accelerated consumers' willingness to use online car-buying platforms. That acceptance isn't likely to reverse, even when life as we know it returns to a more normal state.

Not only are online car-buying platforms poised to thrive down the road, there's also compelling data that suggests used cars are becoming more of a substitute for more-expensive new vehicles, which would also benefit Carvana and Vroom.

COVID-19 has brought a very wild and uncertain stock market, and Thursday's declines were no different. But Carvana and Vroom investors can take the 10% pops and drops with a grain of salt since both are well positioned with their business models.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Carvana Stock Quote
$50.13 (5.96%) $2.82
Vroom, Inc. Stock Quote
Vroom, Inc.
$1.78 (7.88%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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