Headquartered in New York, Vroom (VRM 0.43%) runs a used vehicle e-commerce platform that seeks to leverage data science to streamline and otherwise improve the buying and selling process. Last year, Vroom acquired CarStory, which specializes in automotive retail analytics and AI, and automotive finance business United Auto Credit Corporation.
Despite these additions, Vroom stock has fallen steadily since the company's June 2020 IPO. Apparently, Vroom's shareholders weren't able to capture the returns that one might have expected during the e-commerce renaissance of 2020 and 2021.
As Vroom stock heads toward penny-stock territory, each data release is high stakes for the company and its shareholders. The company's most recent fiscal results may have surface-level appeal -- and contrarian investors might engage in some mental gymnastics to see the glass as half-full -- but a deeper dive suggests that, on the road to profitability, Vroom may be stuck in neutral.
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Sales on a fast track
Naturally, Vroom accentuated the positive in its fourth-quarter and fiscal-year 2021 results. The highlights primarily focused on the company's top-line data, including a 159.2% year-over-year increase in Q4 e-commerce revenue and a 166.8% yearly improvement in e-commerce revenue versus 2020's result.
The company also touted its Q4 2021 e-commerce units sold, which increased 92.7% to 21,243. Vroom acknowledged, though, that this increase was at least somewhat attributable to "strong market demand for used vehicles, caused in part by the shortage of microchips and delays in new car manufacturing." This raises the question of how much longer investors can expect Vroom to capitalize on chip shortages in this way.
Still, there's no begrudging Vroom's "record unit sales and revenues," happily pointed out by CEO Paul Hennessy. Not every data point indicates that Vroom is thriving, however.
Bottom line needs a tune-up
Evidently, turning a profit from digital auto sales isn't so easy. Consider, for example, that Vroom's Q4 2021 vehicle gross profit per e-commerce unit decreased 46.1% year over year, from $878 to $473. Vroom cited a number of factors, including lower sales margins resulting from "high acquisition costs for premium vehicles," as well as increased reconditioning costs due to labor shortages and "elevated demand at third-party reconditioning partners."
Thus, Vroom couldn't escape the macro-level issues of inflation and labor shortages -- not that anyone should expect the company to sidestep these problems, but undoubtedly they're having a material impact on the company's bottom line.
While we're on that topic, Vroom's net loss surged 114% year over year in Q4 2021 to $129.8 million. Moreover, the company's full-year 2021 net loss spiked 83% to $370.9 million versus 2020's result.
Given the company's aforementioned triple-digit-percentage revenue increases, one would be hard-pressed to cite a lack of sales. Rather, Vroom's penchant for spending -- particularly, in the "selling, general and administrative expenses" category -- seems to be the culprit.
It's not hard to detect a pattern, as Vroom spent $185 million in that category in 2019, then $245.5 million in 2020, followed by a doubling to $547.8 million in 2021. The company defines selling, general, and administrative expenses to include, among other things, advertising and marketing, employee compensation, outbound transportation costs, occupancy costs of Vroom's facilities, and various professional/consulting service fees. Don't anticipate Vroom to implement cost-cutting measures in this category anytime soon, as the company admits that its selling, general, and administrative expenses "will increase in the future" as the company expands its operations.
Watch the trajectory
In light of the foregoing results, Wells Fargo analyst Zachary Fadem issued a reassessment of Vroom's future prospects, saying, "The macro narrative is too difficult, operational hurdles appear too great, and long-term profit trajectory too uncertain to continue recommending shares."
That might sound harsh, but it's not unfair. Inflation, supply chain bottlenecks, and labor shortages could take a while to resolve. Moreover, Fadem may be too charitable in characterizing Vroom's "profit trajectory" as "too uncertain."
Indeed, that trajectory could best be described as in free fall, and Vroom seems unapologetic about its fast-rising spend on "selling, general, and administrative expenses." With that in mind, prospective investors would be wise to wait at least another quarter, not only to monitor the macro situation, but also to keep an eye on Vroom's considerable fiscal outlays and how they're impacting the company's bottom line.
