Have we reached the top with Vroom (NASDAQ:VRM) and Vroom stock? It’s possible. Granted, despite a disappointing earnings release last month, shares managed to rally higher going into September, thanks to the overall market “melt-up.” But, this recent move higher may be the last hurrah for this “too hot to touch” automotive e-commerce play.
How so? Namely, the fundamentals that helped drive the stock higher since its IPO (back in June) could be changing. Sure, we are still living in the new normal. Social distancing measures are still helping to drive retail sales from in-person to online.
But, novel coroanvirus tailwinds may be starting to have less of a positive effect. Between rising prices for used cars, and a pivot to sales of lower-cost used cars, it’s clear the growth potential of Vroom stock may be more than priced into shares.
In short, it may be high time to cash out. If you bought in shortly after the company went public, you’ve seen tremendous gains on your investment. Yet, the easy money’s already been made. A bird in one hand is worth two in the bush, as they say.
And, for those who haven’t dived in yet? Avoid for now. There may be a better opportunity in this growth story down the road, once shares retreat further.
Pandemic Tailwinds Peaking for Vroom Stock?
As our own Matt McCall wrote last last month, it doesn’t make sense why this stock continued to rally after its brutal earnings release. Yes, the company’s e-commerce sales rose 74% from the prior year’s quarter. And losses for the quarter (34 cents per share) readily beat Wall Street’s expectations.
But, the horrendous guidance may mean the growth train is going off the rails. With Vroom estimating third quarter sales between $268 million and $290 million (well below analyst’s numbers), tailwinds courtesy of the pandemic may be fast coming to an end.
One factor in the projected sales declines is the shift in demand to lower-priced vehicle sales. This will not only impact sales numbers, but gross margins as well.
To top it all off, the pandemic tailwinds are turning into a bit of a headwind for the used car industry at-large. With a shortage of inventory, dealers are clamoring to build up their supply of used cars. And, as InvestorPlace’s Josh Enomoto noted Aug 21, the situation may be worse for Vroom stock.
Why? Looking to minimize risk as the pandemic first took hold, the company reduced its inventory, at exactly the wrong time. Instead of prudently de-risking ahead of a downturn, the company wound up missing the boat, as the pandemic unexpectedly turned into boom times for used car sales.
The result? Either Vroom is going to spend more to replenish its inventory, impacting Q3 gross margins. Or, unwilling to pony up for supply, the company decides not to fully replenish inventory, affect top line numbers for the quarter.
Either way you cut it, there’s a good chance investors will be disappointed yet again.
What About the Long Game?
Granted, some may not be that concerned with these near-term hiccups for Vroom stock. Investing for the long haul, they are wagering that e-commerce car dealers, such as this company, and its rival, Carvana (NYSE:CVNA), will continue to disrupt the “old school” car dealership space.
I understand this take. There’s plenty of reason why, over time, car sales will shift from in-person to online. Between Millennials and Gen Z preferring a virtual interface to “IRL” transactions, as well as the many headaches and frustrations that come from haggling with used car dealers, I agree this is an industry ripe for technological disruption.
On the other hand, why make this play now, while shares trade near all-time highs? It’s going to take years for e-commerce car sellers to scale into profitable enterprises. Analysts like William Blair’s Sharon Zackifa don’t see the company reaching full-year profitability until 2022.
In other words, there’s plenty of time to enter a position. If and when markets make another correction, chances are Vroom stock heads lower as well. And, at lower prices, the risk/return proposition in name is much more in your favor.
If You Own It, It’s Time to Cash Out
Investors who ignored the skeptics (such as myself), and dived into this stay-at-home economy play, have won big in the past few months. Even with the terrible guidance released last month, shares are just a few dollars below their all-time highs.
Yet, things may be starting to top out. If you bought Vroom stock at lower prices, it’s time to cash out. Otherwise, sit things out for now.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.