Stock Market Analysis

1 Small-Cap Investment That Could Be A Big Growth Winner

Over the last decade, we have seen how e-commerce has changed the way we buy food, clothes, and electronics — but what happens when cars come into the mix?

The best way to describe Vroom (NASDAQ: VRM) is as the result of your local car dealership and Amazon having a child. The concept of how we buy cars hasn’t undergone much change since its inception over 120 years ago in the same way we have seen with other industries such as retail or electronics. However, the industry is starting to see some more innovative change with companies like Vroom and Carvana, founded in 2013 and 2012, respectively. Vroom is an e-commerce marketplace that allows you to buy reconditioned cars online and have them delivered to you. 

Why It’s Hot Right Now

The COVID-19 pandemic has accelerated e-commerce growth worldwide, as evidenced by the unprecedented growth of stocks such as Amazon, Etsy, and Shopify, as well as many more. Etsy, in particular, has highlighted a rise in second-hand online sales, which favors Vroom’s business model. 

With almost 50% of U.S. households experiencing COVID-related income reduction in 2020 so far, consumers will be looking for bargains and second-hand, cheaper items more than ever. Due to this shift in consumer behaviour, I expect the used car market to prosper relative to the new car market for the next 5 years, at least, while the aftermath of the pandemic is still felt throughout the U.S. and the rest of the world. In a survey done by CarGurus, 61% of respondents were open to buying a vehicle online; before the COVID-19 pandemic, this was just 32%. 

Not only can people buy affordable, used, and reconditioned cars online and have them directly delivered to their homes, but they can also sell their cars easily and quickly to Vroom. The process enables consumers to sell their car and have the money in their bank within just a few days. Vroom sold almost 19,000 vehicles in 2019, after selling just over 10,000 in 2018. Average monthly visitors to Vroom’s website more than doubled in 2019 compared to the previous year. Of all total used car sales in the U.S., just 0.9% are sold online. This shows the true potential of online car sales in the U.S. — I can only see this figure increasing over the next 10 years. In Q2 2020, Vroom sold a total of 6,713 cars, up 74% from Q2 2019. 

Vroom’s Long-Term Potential

Vroom ticks a lot of the boxes for a potentially great long-term investment. The company released its Q3 earnings this month, announcing that. Vroom’s e-commerce revenue saw a rise of 25% to $221.8 million, and gross profit on said ecommerce revenue up 120% YoY to $19.3 million. E-commerce unit sales were up 59% YoY with its ecommerce gross profit up 120% YoY. The company saw its gross profit per unit rising by just over 40%.

Its financials are improving greatly since Q3 2019, but investors aren’t laughing all the way to the bank just yet. Texas Direct Auto (TDA), a company that Vroom acquired in 2015, had it’s year-on-year (YoY) revenue slashed by 64%. According to Vroom’s Q3 2020 financials, TDA’s huge drop in revenue was primarily due to ‘the decrease in TDA units sold and a lower average selling price per unit, which decreased from $30,236 to $24,316’. This, in my opinion, was solely a result of the COVID-19 pandemic and we should see increases in these numbers in the coming years. Vroom’s share price has dropped almost 20% since earnings — putting a company with otherwise sound fundamentals at a great bargain.

Nonetheless, this drop in revenue shows that Vroom still has a long way to go regarding business development and further prioritization of this element of the company. Vroom still has yet to catch up with the pandemic-fueled growth other e-commerce companies have seen in the retail and tech spaces. The company is seeing its e-commerce sales growing at a faster YoY rate than its prime competitor, Carvana. The pandemic has had a crushing impact on the company’s stock —  it sits at $36.23 at the time of writing, which is a massive drop from its high of $75.49 on September 1. 

So, this stock definitely isn’t for the risk-averse investor, however, by investing in Vroom via small increments, I am confident this will be a long-term winner.

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Adam Barry
Adam Barry
Adam is a contributing writer here at MyWallSt. Adam loves innovative SaaS tech companies; in particular ones that give people the freedom to make money or start a side hustle, like Etsy, Fiverr and Shopify.