If you owned shares of Vroom (NASDAQ:VRM) stock the day after the company reported earnings, you are breathing a sigh of relief. The company’s shares are soaring over 10% in after hours and pre-market trading. That’s the kind of thing that happens after you post a double beat.
Vroom posted earnings per share loss that was five cents better than expected. Revenue of $591 million was well above the $517 million that was forecast. And the stock received at least one price upgrade since the earnings report.
That’s the good news. The bad news is that as the market opened, the gains in VRM stock were cut in half and in the first hour of trading the stock is trying to hold on. Unfortunately this is a familiar pattern with VRM stock. Since going public in 2020, the stock has shown an inability to hold onto gains despite rising revenue.
Will this time be any different? It appears that the market for online used cars is increasing. But Vroom isn’t alone in this space and its competition is performing well.
What’s Old is New Again
The global shortage in semiconductor chips is going to have surprise winners. And Vroom may be one of those. Automakers increasingly rely on chips not just for the electric vehicle future that analysts envision, but also for the current crop of internal combustion vehicles. In 2020, Vroom forecast that the online used car market could reach $400 billion by 2030.
That means that a company like Vroom should do well as quality pre-owned cars become attractive to buyers who are looking to use their pent-up savings for something other than travel. And also because many Americans will be looking to travel by car as opposed to getting on an airplane.
The Competition is Thriving
I would be more optimistic about the prospects for Vroom if the company had the field to itself. It doesn’t and VRM stock is lagging behind two key rivals Carvana (NYSE:CVNA) and CarMax (NYSE:KMX). And not just by a little.
In the trailing twelve months, VRM stock is down 23%. Compare that to CVNA stock which is up 157% and KMX stock that is up 61%. Narrowing the time frame to just the current year performance, the story changes only slightly. KMX stock is up 28% and Carvana is down about 2%. However Vroom is down by approximately 7.5% even with the bump from the earnings report.
In my mind, this signifies that demand has been in place for awhile. And while the pie might be getting bigger, Vroom will have to execute flawlessly to capture significant market share.
Vroom Remains a Speculative Stock
I’m sure VRM stock bulls would point to three-quarters of increasing revenue as a sign that the company is moving in the right direction. You could also point to a price/sales ratio that is better than that of Carvana.
Maybe that’s a story that will play out. However the company’s EPS loss is expanding at the same time it’s growing revenue. A company that is earning more but moving further away from profitability is a tough sell for me. Vroom is having a problem with scalability and that’s a card you can only play for so long.
I understand that some will say that Vroom is a tech stock. The company uses data science and artificial intelligence in its modeling. And it acquired Carstory in 2020 for $120 million which could explain a lot of its EPS loss.
However, I would assert that just because a company uses technology doesn’t make it a tech stock. After all Carstory is still a service that can be used by brick-and-mortar used car dealerships even though Vroom is now the owner. That doesn’t make those dealerships technology companies.
With all that said, VRM stock appears to have a high ceiling. And trading below $40 a share at the time of this writing, the stock is certainly not overvalued. But with short interest on the stock continuing to be around 10%, this seems to be a heavy lift right now.
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Like any group of stocks related to travel and tourism, hotel stocks saw a steep drop in share prices in 2020. The leisure and hospitality sector that once had 15 million employees has lost 4 million jobs since February.
Many major cities will be feeling the ripple effects of the Covid-19 pandemic for years. However, there is ample evidence that shows the pandemic may be coming to an end. The number of new cases is dropping. The number of those getting vaccinated is rising. And even in the cities with the most restrictive mitigation measures, the slow process of reopening is beginning.
All of this can’t come fast enough for individuals who rely on the travel and tourism industry for their livelihood. Hotel chains had at least some revenue coming in the door. And when earnings season concludes, the more budget-friendly hotel chains may realize revenue that is 75% of its 2019 numbers. But that is not enough to bring the hotels to anywhere near full employment. Particularly with hotels that have bars and restaurants that have remained closed or open at limited capacity.
Many economists are optimistic that travel may begin to look more normal by the summer of this year. And the global economy may deliver 6.4% GDP growth this year. With that in mind, the hotel chains with the best fundamentals and the broadest footprint will be in the best position as the economy reopens.
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