Why This Used Car Seller Could Drive the Next E-Commerce Boom

Buying and selling cars once required spending hours in a dealership. But up-and-coming vehicle retailer Vroom (VRM -0.61%) combines both convenience and AI-driven market data to potentially capitalize on the future of buying and selling cars. As Vroom conquers market share in the next e-commerce revolution, investors who climb in now may be able to ride to profits in style.

Image source: Getty Images.

Buy and sell smarter, not harder

Vroom buys and sells cars through its online platform. Purchases come with both a trial period for potential returns as well as a free limited warranty. When you're ready to buy, Vroom has partnered with multiple banks to offer financing options -- and it'll even offer to buy your old car during the process. The buyer receives an offer valid for seven days, and if they sell, Vroom gets more inventory in return. The platform as a whole is meant to create convenience for consumers. 

Automotive e-commerce attempts to make car buying and selling easier. Vroom offers convenient pickup and delivery of vehicles directly to consumers' doorsteps. Car shoppers can avoid the pressure of dealership price-haggling and complete the process entirely from home. But to survive, Vroom will need more than convenience -- it'll also need continued growth.

Vroom's growth metrics suggest the company might indeed have the potential to change the car-buying market. In FY20, it sold 82% more e-commerce units -- cars, SUVs, and trucks -- year over year, with revenue increasing 56%, and gross profit jumping a huge 89%. Vroom attributed that expansion to both increased inventory and marketing spend. 

Even after a fantastic year of growth, Vroom still has plenty of competition, with Carvana (CVNA 8.79%) leading the pack of rivals. Carvana has a larger market cap, but that doesn't necessarily make it the better retailer. Vroom offers a better standard warranty, covering each vehicle for 2,000 more miles than Carvana does, and Vroom includes a year of roadside assistance. That additional peace of mind could be a difference-maker for some customers when buying pre-owned vehicles. 

Both online platforms have many similar features so the minute details of their offerings, inventory, and back-end technology are critical. Both companies are still showing respectable growth metrics; below, we'll put them head-to-head to see how their valuations match their underlying businesses.

Source: Company earnings releases.

Investors are paying quite the premium for Carvana. In contrast, Vroom managed to not only grow during a worldwide pandemic but also complete this daunting task without running up the debt on its balance sheet. It also has more attractive valuation metrics in both the P/S and P/B ratios, especially when you consider that smaller-cap growth companies tend to grow faster than mid- to large-cap growth companies. This all equates to a large amount of growth already priced into debt-heavy Carvana, while Vroom remains undervalued and flush with cash.

Anticipating market trends

Vroom's recent acquisition of CarStory could give it the advantage in a crowded market. CarStory aggregates and optimizes vehicle market data from thousands of sources. This market data identifies a plethora of variables such as average purchase price, vehicle model preferences, and the year those models were produced. This data can then be used to identify market trends in automotive retail. Integrating this AI into Vroom's core business could allow the company to better anticipate customers' needs, accelerating its customer acquisition and gross margin growth. 

Other retailers use different forms of market data collection and AI by monitoring traffic on their sites. For example, Carvana's most recent quarterly report announced data monitoring of about 244,000 purchases last year. By comparison, CarStory analyzes about 7 million listings every day, collected from various automotive dealerships' current and recently sold vehicles. Not all of those listings are purchases, but it's easy to see how large an advantage CarStory has in data accumulation.

There is a chance that Vroom doesn't capitalize on growth potential by failing to grow its average profit per unit, or simply not selling enough vehicles. This failure could cause it to fall behind in a highly competitive market. However, Vroom's integration of CarStory AI, combined with its thus-far successful growth strategy, should continue to increase its market share. This strategy will eventually peak at an optimized gross profit per unit. It will then simply need to continue to sell more inventory than the previous quarter to keep growing. 

As the worldwide pandemic starts to ease, Vroom can put more cash to work through buying inventory and increased advertising. Investors should watch movement on both gross profit per unit and number of units sold over the next year. The continued growth of these two metrics is key to Vroom's future growth. If it can continue on the path it's set, Vroom may be able to capitalize on the automotive e-commerce boom with a combination of both AI market data and convenience.