New York City-based online used-car retailer Vroom, Inc. (VRM) has benefited from strong market demand for used vehicles and skyrocketing prices over the past year, caused in part by a global shortage of semiconductor chips and delays in new car manufacturing. Ecommerce units sold in its fiscal fourth quarter increased 92.7% year-over-year to 21,243, while VRM sold 74,698 units in 2021, up 117% year-over-year. The company has also been expanding its market footing, rolling out more of VRM’s Last Mile hubs across the country over the past months, with more than 30 launched so far.
However, VRM posted a wider-than-expected loss in the fourth quarter, despite solid topline growth, due to lower margins and higher reconditioning costs due to labor shortages and higher demand for third-party reconditioning companies. Also, the company expects its first-quarter revenue to come in at $875 million, well below the previous $1.04 billion Wall Street consensus. Following the news, Wells Fargo analyst Zachary Fadem slashed his price target to $6, from $16. “We believe the macro narrative is too difficult, operational hurdles appear too great, and long-term profit trajectory too uncertain to continue recommending shares,” Fadem said.
VRM shares have slumped 91.4% in price over the past year and 72.9% year-to-date to close yesterday’s trading session at $2.93. Furthermore, J.P. Morgan analyst Rajat Gupta sees little hope for a near-term improvement in investor sentiment, given inconsistent execution, elevated spending levels, and an uncertain outlook, considering the constrained labor and logistics environment.
Here is what could shape VRM’s performance in the near term:
Weak Bottom Line
For its fiscal fourth quarter, ended Dec. 31, 2021, VRM’s total revenue increased 130.3% year-over-year to $934.49 million. However, its loss from operations stood at $125.25 million, up 110.9% from its year-ago value. The company’s non-GAAP net loss came in at $128.12 million, indicating a 118.7% increase from the prior-year quarter, while its non-GAAP net loss per share rose 113.6% year-over-year to $0.94. In addition, its adjusted EBITDA grew 114.4% year-over-year to $119.85 million.
Analysts Expect EPS to Remain Negative
The Street expects VRM’s revenues to come in at $873.97 million in the current quarter, ending March 31, 2022, indicating a 68.7%increase year-over-year. Furthermore, its revenue is expected to grow 30.9% in the following quarter and 24.7% in the current year. However, the negative $1.01 consensus EPS estimate for the current quarter and negative $0.89 for the next quarter indicates 77.2% and 85.4% year-over-year declines, respectively. Also, its EPS is expected to decrease 31.7% in the current year to negative $3.53. In addition, analysts expect VRM’s EPS to decrease by 16% per annum over the next five years.
Bleak Profit Margins
VRM’s 6.35% gross profit margin is 82.3% lower than the 35.91% industry average. Also, its EBITDA and net income margins of negative 10.85% and 11.65%, respectively, are substantially lower than the 2.58% and 6.68% industry averages.
Moreover, VRM’s ROE, ROA, and ROTC of negative 34.63%, 15.67%, and 12.35%, respectively, compare with the 17.25%, 6.09%, and 7.91% industry averages.
POWR Ratings Reflect This Bleak Prospects
VRM has an overall F rating, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an F grade for Quality, which is consistent with its negative profit margins.
VRM has an F grade for Stability, in sync with its 24-month beta of 1.81.
Among the 45 stocks in the Specialty Retailers industry, VRM is ranked the last.
Beyond what I have stated above, you can view VRM’s grades for Sentiment, Growth, Momentum, and Value here.
View the top-rated stocks in the Specialty Retailers industry here.
Bottom Line
Although VRM enjoyed increased used car sales, its topline growth did not translate to bottom-line improvement in its last reported quarter due to headwinds, including higher costs and lower margins. Furthermore, the supply of semiconductor chips is expected to improve later this year, and automakers investing in ramping up production could have a knock-on effect in reducing demand and prices for used vehicles. Also, considering bearish analysts’ sentiments regarding the company’s prospects, we think it could be best to avoid the stock.
How Does Vroom, Inc. (VRM) Stack Up Against its Peers?
While VRM has an overall POWR Rating of F, one might want to consider investing in the following Specialty Retailers stocks with an A (Strong Buy) rating: Destination XL Group, Inc. (DXLG) and Cato Corporation (CATO).
Note that DXLG is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.
VRM shares fell $0.06 (-2.05%) in premarket trading Thursday. Year-to-date, VRM has declined -73.40%, versus a -10.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.
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