What happened
Shares of used-car company Vroom (VRM -2.90%) fell on Thursday after results for the third quarter of 2020 failed to impress investors. Considering results and guidance both fell inside of analyst expectations, it's hard to tell exactly where the rub is. But as of 1 p.m. EST, the stock was down 9% for the day and hitting its lowest point since its initial public offering earlier this year.
So what
Vroom has three reportable segments, but the one investors care about the most is its e-commerce division. Overall revenue was down 5% year over year because sales dried up at its one used-car lot. But Q3 e-commerce revenue was up 25% from the third quarter of 2019. However, unit sales were up a much more impressive 59% in the e-commerce segment, resulting in a 120% surge in gross profit.
Image source: Getty Images.
Now what
Vroom is guiding for fourth-quarter revenue of $372 million to $414 million. While this is within official expectations, perhaps investors secretly wanted more considering the coronavirus tailwinds driving used-car e-commerce. If that's the case, investors in this growth stock should remember that revenue is dependent on the average selling price of the cars. But Vroom is trying to expand its market share among consumers of lower-priced vehicles, which negatively affects its top line.
The bigger thing to watch with Vroom is its gross profit per vehicle and overall unit volumes. If the company sells more lower-priced vehicles with higher margins, then it's possible for the business to dramatically improve despite lackluster revenue growth.
On that front, at the midpoint of its guidance, Vroom is guiding for unit growth of 74% year over year. The company certainly has the capacity to achieve this goal considering its inventory is currently at a record high. And with its gross margin growing in Q3, next quarter's unit growth could provide nice improvements to profitability. To me, this is all trending in the right direction.
