Today, Vroom (NASDAQ: VRM) went public.
If you haven’t heard of the company, it provides a platform to research, discover, buy, and sell vehicles. It’s similar to a company that went public a couple of years ago called Carvana (NYSE: CVNA). You’ve probably seen its commercials once or twice while being stuck at home during these few months of lockdown.
Its commercial is about buying a new or used car online and how the company will deliver the car to you — so, if you’re in the market for a car, no need to go to the dealership during a pandemic. When I first discovered Carvana’s IPO and read up on it, I thought it was very unique. Why hasn’t something like this caught on sooner?
Thanks to Carvana’s unique concept, it has become the leader in its market. But it may soon have some competition from Vroom. To get an idea of what we could see from Vroom in a few years, take a look at Carvana: It went public in June 2017 and priced its shares at $15 per share. Now, two years later, the company trades near $111 per share.
According to Vroom’s IPO filing, the U.S. used auto market generated about $841 billion in sales and sold about 40 million units in 2019. In 2019, Vroom reported revenue of $1.2 billion, which was up 39% from 2018. Taking a look at Carvana’s financials — it reported revenue of $3.94 billion in 2019, which was around double what it reported in 2018. So, we can see that there is money to be made in this market.
Vroom’s IPO filing said of the market:
It also is ripe for disruption as an industry that is notorious for consumer dissatisfaction and has one of the lowest levels of e-commerce penetration.
Vroom and Carvana’s market is in demand. There hasn’t been an e-commerce platform for buying and selling vehicles. It’s a fairly new concept, and advertisements are now alerting consumers to this new way of car buying.
People spend a lot of time online shopping and researching, and buying a new vehicle takes a lot of research. I bought a new car a few years ago. I had been dreading it because I didn’t want to go into a dealership just to sit around and wait for them to sell me something I didn’t need. But I didn’t really have a choice and ended up at the dealership anyway. I think buying my car took about four hours that day, and most of it was sitting at a desk while the salesman went through prompts “offering” packages that were “a good deal.”
Without a doubt, buying a car is exhausting. It’s also something that you don’t want to rush. That’s why I think platforms like Carvana and Vroom will continue seeing success.
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Vroom’s IPO
Vroom has filed to raise $300 million in its public offering. Before I get into the details of its IPO, let’s talk about the company for a second. Vroom is based in New York and is headed by CEO Paul Hennessy, who joined the company back in 2016. Hennessy had a few leadership roles prior, including most recently serving as CEO of Priceline.com.
The company has developed an online website that provides a marketplace for buyers and sellers of used vehicles. According to a market research report by McKinsey & Company, the used car market is much larger than that of new cars. The report also estimates that “the number of used vehicles three years old or less will increase from 51% of the total in 2017 to about 60% in 2022.”
The demand for a business like Vroom’s is apparent, but will its financials hold up? As of March 31, 2020, it had $169.8 million in cash and $262 million in total liabilities. Vroom has been able to sharply increase its top-line revenue, but at the same time has increased its operating losses. So the company needs to keep an eye on some things and not go overboard with spending.
Vroom’s filing specifies what it will do with the money earned from its IPO:
We intend to use the net proceeds from this offering for general corporate purposes, including advertising and marketing, technology development, working capital, operating expenses and capital expenditures. We may also use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies; however, we do not have agreements or commitments for any material acquisition or investments at this time.
It’s always good to see that a company plans on using IPO proceeds to expand and improve on its operations. It would be a bad sign if the only reason the company was going public was to pay off its debt. It hasn’t been profitable since it began in 2012, but it’s worth noting that Vroom may have been impacted by COVID-19.
The company could be experiencing a drop in sales and that will most likely show up in its second-quarter financial results. Despite this, Vroom is growing rapidly and the effects of the COVID-19 pandemic could be temporary. With the U.S. opening back up, the company could get on that rapid growth trajectory again.
Vroom went public on the Nasdaq under the ticker symbol “VRM.” It priced its IPO at $22 — above its initially expected IPO price target of $18–$20 per share. The lead underwriters for its IPO are Goldman Sachs and Bank of America Securities.
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Until next time, Monica Savaglia Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.
