Vroom Can’t Quite Make It Happen
Vroom (NASDAQ:VRM) emerged as one of our top recovery plays in the summer of 2020 but hasn’t quite been able to make things work. At least not in the way the market wants. The company continues to be supported by post-pandemic trends, eCommerce, and the shift to pre-owned vehicles but it is plagued by a malaise that has begun to infect the broader market. The rebound was so strong, the outlook so good, that consensus estimates and/or market sentiment outpaced reality. Now, after failing to impress the market, the stock in correction once again and setting up the next entry opportunity. The question is when will it come and at what price will the market get interested again?
Growing Too Fast Is Vroom’s Problem
To say that Vroom delivered a bad report is like saying filet mignon is only a steak. While the results fell short of consensus estimates the results are great and there are mitigating factors that have this company set up for growth in 2021 and beyond. The $405.83 million in revenue technically beat the consensus estimates but not the most recent revisions and only by 115 basis points. In a world where better than expected is the norm 115 basis points from a high-growth name like this are only meh in terms of market sentiment. The takeaway for us is that revenue grew sequentially by 27% in the Q2 to Q3 period, 25% in the Q3 to Q4 period, and is expected to grow another 25% or more in the current quarter.
Moving down the report, the company’s net loss widened but this is where those mitigating factors come into play. First, the company says that capacity limitations are hurting both top and bottom results. In the one case, the company could sell more cars if it had the capacity, in the other, efforts to scale the company to meet the robust demand are cutting into the bottom line. Together, the company failed to sell as many units as it might have and spent more money than it technically needed to sell those cars. This deleveraged company expenses and resulted in a $0.08 miss for GAAP earnings and $0.07 miss for adjusted EPS. The takeaway here is that the company can and wants to sell more cars, and is taking the necessary steps to do so.
“Vroom had a strong fourth quarter, with significant year-over-year growth in our ecommerce business. Inventory and marketing are scaling as planned, which is increasing the velocity of the Vroom flywheel, driving conversion, and increased sales and revenues … As the used vehicle market continues to embrace the ecommerce model, we will continue to execute our plan and invest in scaling our business and improving our customer experience as we transform the market for buying and selling used vehicles,” commented Paul Hennessy, Chief Executive Officer of Vroom.
As for guidance, the company actually gave some pretty good guidance as well but once again it’s a case of great not being good enough. The company is expecting to see eCommerce sales grow 80% YOY at the midpoint of the range with growth in physical sales as well. The consensus is for growth in the range of 150%. In terms of earnings, the company is predicting a loss of ($0.61) to ($0.68) compared to the consensus of ($1.28) which reflects the strong margin gains seen in the eCommerce channel in the 4th quarter.
The Technical Outlook: Vroom Goes On Sale
Shares of Vroom are absolutely imploding in the premarket session but this is a knee-jerk reaction that has been compounded by short-selling. The short-interest on this stock is running near 10% and could continue to weigh on share prices in the near-term. That said, the stock is trading near the bottom of its post-IPO range and very near to potentially strong support levels. If support confirms at or above $36 or $32 we expect to see short-covering begin and signal the start of the next major bull run. Longer-term, this stock is expected to rebound later this year coincident with ramping revenue and profitability.
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