How Does Vroom Make Money?

VRM: Vroom logo
VRM
Vroom

Vroom (NASDAQ: VRM), an online platform to buy, sell, or trade used vehicles online, listed on the markets in early June, and the stock has more than doubled from its offer price of $22 per share to about $55 currently. The company has been recording strong revenue growth, with sales rising from about $855 million in 2018 to about $1.2 billion in 2019 and we expect growth to accelerate over 2020 to about $1.7 billion, as the Coronavirus pandemic and the economic downturn are expected to increase demand for used cars. We think Vroom is well-positioned to capitalize on this, considering its end-to-end e-commerce model, that offers transparent pricing, financing options, and nationwide contact-free delivery. Our interactive dashboard Vroom Revenues: How Does Vroom Make Money? discusses Vroom’s business model, followed by sections that review past performance and 2020 and 2021 expectations for the company’s revenue drivers, and competitive comparisons with rivals Carvana and CarMax. Some key elements of this analysis are discussed below.

Vroom reported about $1.2 billion in Total Revenues for full-year 2019. This includes 3 operating segments:

1. Ecommerce ($588 million or 49% of Total Revenues in 2019): sources inventory from auctions, consumers, rental car companies and dealers, reconditions the vehicles, and sells to customers via its website and app while offering financing and other services.

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2.Texas Direct Auto ($390 million or 33% of Total Revenues in 2019): segment includes the company’s only physical retail location, its owned vehicle reconditioning center as well as Vroom’s Sell Us Your Car Centers.

3.Wholesale ($213 million or 18% of Total Revenues in 2019): Vehicles that do not meet the company’s retail sales criteria are sold via wholesale auctions, with revenues recorded under this segment.

Vroom’s Ecommerce segment 

  • Sales from the Ecommerce segment rose 95% from $301 million in 2018 to $588 million in 2019, as volumes expanded from 10k units to almost 19k units, with average selling prices rising by about 3% to $30,500.
  • We expect revenue to grow to $1 billion in 2020 and to about $1.75 billion in 2021, as deliveries continue to rise due to growing visibility of the company’s platform (947k average monthly unique visitors, over 2x year-over-year) and demand for used cars on account of the Covid-19 pandemic.
  • The used car market is likely to recover much faster from the Covid-19 related disruption, as people are typically more frugal during times of uncertainty.
  • Moreover, considering the current health crisis, people are likely to favor cars over public transport and used cars could hit the sweet spot.

Vroom’s Texas Direct Auto & Wholesale Segment

  • Revenues from Vroom’s TDA segment grew from $380 million in 2018 to $390 million in 2019, driven primarily by higher average selling prices, although volumes saw a slight decline.
  • We expect the metric to grow much slower than the eCommerce operations, with sales rising from $410 million and $430 million in 2020 and 2021.
  • The wholesale business, which is Vroom’s smallest division, saw sales grow from around 174 million in 2018 to 213 million in 2019.
  • We expect wholesale revenues to grow to about $256 million in 2020 and $307 million in 2021.

While Vroom stock has soared since its listing, there are other large-cap opportunities that also look interesting. Which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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