Despite shares having been publicly traded for little more than three months, investors of
Vroom (NASDAQ: VRM) have already experienced their fair share of ups and downs. They IPO’d in the middle of June as the dust of the first wave of COVID-19 was still settling but that didn’t faze them. The
online marketplace for used cars quickly fell into favor with Wall Street and caught the wave of enthusiasm for internet stocks that came to define this summer’s rally.
Shares were up close to 80% coming into August when a little bit of reality hit. As the company’s first public earnings report hit the wire, investors' faces fell. GAAP EPS was 3x deeper in the red than expected while revenue was barely up 3% year on year. Not exactly the kind of wow factor Wall Street might have been expecting based on more recent IPOs.
While investors might have been ready to forgive the lacklustre numbers given the pandemic had just rolled through, most of the damage stemmed from the weaker than expected forward guidance. Management lowered their Q3 revenue forecasts by about 20% and shares weren’t slow about gapping down 20% the next day.
Strong Bids
Still, they showed resilience and a steady stream of bids flowed in that helped propel shares to all time highs by the start of September. Then came some fairly aggressive profit taking across tech and internet stocks as the NASDAQ fell more than 10% and the S&P 500 had its worst run of days since March. Vroom didn’t escape the change in sentiment and coming into this week, shares were down 40% on the month. Suffice to say that Vroom investors have had their fair share of highs and lows in recent weeks.
But looking forward to the rest of the year, it’s looking likely that there’ll be more highs than lows as some sell-side heavyweights have rowed in behind the company’s mission. On Tuesday, Goldman Sachs were out with an upgrade, moving shares from Neutral to Buy. They also slapped a fresh $60 price target onto them, implying upside of more than 30% from this week’s lows.
They’re particularly bullish on Vroom’s growth prospects and ability to continue capturing substantial market share from smaller dealers who are struggling to stay afloat in the post-COVID landscape. The recent haircut to the share price offers, in their view, a fantastic entry point for new investors to get involved.
Attractive Entry Point
Their positive outlook mirrors that of the folks over at Wells Fargo who last week maintained their Overweight rating and doubled down on some key areas. In a note to clients, they listed out the key reasons for their bullish stance. "1) Q3 is tracking ahead of plan, industry momentum is strong, and with investor interest high, we believe an opportunistic capital raise makes sense; 2) With ~$1B of fresh capital, we expect Vroom to aggressively re-build its inventory, make modest infrastructure investments and pull forward a host of long term initiatives that should ultimately drive upside to FY20-22 unit/GPU estimates; and 3) Carvana (NYSE: CVNA) shares have traded +26% (on average, vs. +7% SPX) in the month following its last 3 capital raises, and considering VRM's post-offering pullback, we view recent weakness as overdone."
The capital raise being referred to was in relation to the 11 million share offering by Vroom earlier this month. The company is now well positioned from a cash perspective to ride out any short term volatility while also focusing on long term growth. Investors should consider current prices to be attractive entry points given we’ve seen how quickly shares can run.
On top of that, as Wells Fargo pointed out, equity raises have been bullish catalysts for shares of Carvana, one of Vroom’s biggest competitors so it looks like Vroom is ready to put the pedal to the metal.
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