Online used car seller Vroom (VRM) posted its earnings report Monday night. The results were better than expected in some slots but still generated plenty of disappointment – particularly regarding revenue. The disappointment was sufficient enough to send the company down ~34% on the day so far.
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The good news for Vroom was that it did manage to beat consensus expectations for earnings. The bad news is that no one was expecting much out of Vroom this quarter anyway. The company posted a loss of $0.73 per share. Consensus figures from Zacks, meanwhile, were looking for a loss of $0.77 per share.
Revenue, however, fell short of expectations. The company posted $475.44 million in revenue for the quarter, which was 37.6% below the consensus estimate. The issues facing Vroom were felt throughout the used car market; CarGurus (CARG) is also down 23% today after reporting earnings.
The news isn’t good for Vroom, and by now, a good chunk of the reason why is pretty clear. The enormous supply-chain issues hitting car companies this year have had plenty of impact on the used car market. Just driving past used car lots these days will give you all the proof you need on that front.
While Vroom shares certainly seem attractively priced, I’m neutral on the company right now. Things aren’t likely to get better any time soon, but they may down the line.
The last 12 months for Vroom have been a near-continuous search for the bottom. Last August, Vroom shares were much higher, challenging the $40 mark. Immediately after that peak, share prices started to drop until they reached current levels. Now, Vroom shares aspire to once again break the $2 per share mark.
Analysts Think VRM Stock Will Go Up
Turning to Wall Street, Vroom has a Moderate Buy consensus rating. That’s based on two Buys and four Holds assigned in the past three months. The average Vroom price target of $3.52 implies ~118% upside potential.
Analyst price targets range from a low of $1.50 per share to a high of $8 per share.
Insiders Have Been Buying Vroom
On the surface, investor sentiment metrics may not look that good. Vroom has a Smart Score of 4 out of 10. That’s the lowest level of “neutral.” It suggests that Vroom has a slightly better than even chance to underperform the broader market. Despite this, however, the insider trading figures at Vroom are clearly looking for a breakout to come. This has been particularly true for the last three months. The last three months have featured nothing but Buys.
In fact, Vroom has seen 10 insider transactions in the last three months. The last time an insider sold Vroom was back in March when four such transactions took place.
Over the whole year, however, it’s a bit different. Buyers still lead the way, but by a closer margin of 16 Buy transactions to six Sell transactions.
VRM Stock: Similar to Buying a Lottery Ticket?
There is one bit of good news for Vroom in all this. The company is selling well below its average price target. Vroom might ultimately fold, but when you can buy 200 shares for less than the cost of a low-end television, investor risk, from an absolute perspective, is pretty minimal at this state. It’s a lot like buying Powerball tickets at this point, except the returns would be much smaller, and the shares are a lot less likely to be worthless tomorrow.
There’s no doubt that the used car sector has been taking a beating in the last several months. First, ongoing supply-chain issues made used cars hard to come by. People were hanging on to their old cars because getting a new car was next to impossible.
Remember Ice Mountain in Detroit; several thousand completed Ford Broncos were parked in a snowy parking lot, waiting for the last computer chips to arrive and get the new Fords up and running.
While there were signs that Ice Mountain had started to thaw and cars started to sell, by mid-March, the sight of hordes of cars simply parked in the snow awaiting final assembly was telling.
There are signs that things may be coming around, however. Used vehicle values saw a small decline between June and July. The Manheim Used Vehicle Value Index dropped 0.1% in month-over-month comparisons.
While year-over-year comparisons are still clearly elevated—they’re sitting at 12.5% higher overall—the end result remains that used car prices are starting, just barely, to relent.
It’s also worth noting that Vroom is seeing quite higher profitability when it does sell a car. Its gross profit per unit figure increased 106% to $3,629. That’s actually a new record at Vroom.
For those willing to accept higher risk, there’s another potential reason to get in. Reports suggest that meme-stock speculation is returning, and short squeezers are looking to add Vroom to their list of targets. That could prompt some substantial gains in the short term, though a recovery to its year-ago heights is likely out of line.
Conclusion: Is VRM Stock a Buy or Sell?
Here’s the big takeaway from Vroom right now. There’s a lot going on under the hood of this stock, and not all of it is good news. There is certainly a path to victory here, but that victory might be as short-lived as it is substantial. With several competitors in an ever-tightening field, Vroom may ultimately buckle. That’s why I’m neutral on Vroom right now.
There’s a case for speculation here; when a stock comes in around the $1.60 per share range, it’s hard to blame anyone for picking up a hundred shares or so just to take the chance of a two-bagger on the hoof. Insider trading seems to think there’s a possibility of that happening.
Also, if used car supplies start improving—which they may, based on the Manheim figures—that will improve Vroom’s long-term position. Regardless of these possibilities, Vroom is, ultimately, still very much a gamble.
