What happened
Shares of Vroom (VRM +0.00%), a used vehicle e-commerce platform offering a digital approach to buying used vehicles, jumped as much as 15.2% higher Tuesday morning after competitor Carvana announced it expected record results in the third quarter.
So what
Vroom and Carvana share many business strengths, including that the two business models were ideal to serve customers at a time of social distancing while most auto stocks struggled. The COVID-19 pandemic has almost certainly accelerated consumers' adoption of online car buying, and with Carvana announcing it expects records in total revenue, retail units sold, EBITDA margin, and gross profit per unit (GPU) for the third quarter, investors are betting that Vroom is seeing much of the same demand strength.
In a vote of confidence, Goldman Sachs upgraded ratings of Vroom and Carvana from neutral to buy: "We continue to see dynamics surrounding COVID-19 accelerating the shift online in used autos, but beyond that we expect Carvana and Vroom to drive the shift online by leveraging national scale to aggregate demand in a highly fragmented market and take share from the long-tail of small dealers and peer-to-peer market," noted Goldman Sachs analyst Daniel Powell and his team.
Image source: Getty Images.
Now what
Both Vroom and Carvana have proven their business model was built to thrive during social distancing requirements, but one knock against the companies is that their rapid expansion meant they were rapidly burning through cash. The next step for both companies will be to optimize their business and scale to reach profitability. Investors are intrigued with Vroom's prospects, especially considering how similar it is to Carvana, and the fact that Carvana's stock price has risen an incredible 1,220% over the past three years. However, Vroom has much work to do if it is to follow in those footsteps, and even Carvana has yet to turn a profit.
