Bill Miller Is Bullish on Vroom

GuruFocus.com
·6 min read

- By Dilantha De Silva

Vroom Inc. (NASDAQ:VRM), an emerging online car dealer that offers several value-added products, reported better-than-expected revenue for 2020, which suggests the company is well-positioned to deliver strong financial results in 2021 considering the expectations for a full reopening of the economy in the second half of this year.

What makes Vroom interesting is that it has followed a different strategy than that of its biggest rival Carvana Co. (NYSE:CVNA) since the company went public. The below table provides a summary of the main differences between the two online car dealers.


Bill Miller Is Bullish on Vroom
Bill Miller Is Bullish on Vroom

Source: Consumer Affairs

In 2020, Vroom attracted well-known investors such as Bill Gates (Trades, Portfolio) and Bernard Arnault, which was one of the main reasons behind its stellar stock market performance in the first eight months of last year.

Renowned value investor Bill Miller seems to be bullish on the company as well. In an interview with CNBC last week, Miller said, "That's a name we think you could make multiple times your money in the next three or four years," suggesting the company is now undervalued after shedding 33% of its market value since last September.

The business

Vroom, formerly known as Auto America, Inc, is a New York-based online auto dealer that sells new and pre-owned vehicles, spare parts and accessories. In addition to this, the company provides vehicle repairing and maintenance services, financing through lenders, insurance and vehicle rental services with delivery directly to consumers. The company is part of the automobile dealership industry, and its main rivals are Carvana, CarGurus, Inc. (NASDAQ:CARG) and Shift Technologies, Inc. (NASDAQ:SFT).

Currently, Vroom's e-commerce platform is only available to customers in the United States, but the company has still benefited from the dramatic transition to online shopping. While almost all the companies engaged in auto dealerships were affected negatively by the closure of their stores and customers limiting non-essential travel in 2020, tech-focused car dealer platforms such as Vroom have moved in aggressively to take market share from traditional car dealers who prioritized a brick-and-mortar model.

The economic instability and turmoil in the automobile industry made it difficult for Vroom to obtain attractive pricing in 2020, which led to declining operating margins. The total revenue of the company increased to $1.35 billion in 2020 from $1.19 billion in 2019, but the net loss widened from $143 million to $202.8 million. For Vroom to reverse things from this trend, the company is banking on a reduction in inbound shipping costs in the future along with a decline in reconditioning costs.

Although the market value of the company soared during the first half of 2020, the stock dived in September, only to gather some momentum along with the rollout of the vaccination program in December. JP Morgan (NYSE:JPM) analyst Rajat Gupta upgraded the company's stock last September to "buy" without changing his price target of $65 as he believes the downturn in Vroom stock was "driven by a broad market rotation away from momentum stocks," which provides an attractive opportunity to enter into a company with a business model he has long admired "as favorable in the long-term."

Industry outlook

Auto dealers serve as a link between vehicle manufacturers and consumers in the U.S. Therefore, the automobile dealership industry plays an important role by filling the gap between the demand and supply for vehicles in the country.

According to IBIS World, which provides industry research reports, the outlook for the industry looks positive. Last year, the Fed delivered an emergency rate cut to revive economic growth in the country, and the Fed is likely to keep interest rates at historic lows at least through the end of this year, which is a positive outcome for auto dealers. The revenue for the industry in the U.S. is anticipated to rise this year as a result of this macroeconomic development as the cost of financing cars becomes more affordable to consumers when policy rates are low.

Furthermore, low interest rates will increase profitability for dealership owners as floorplan financing, or the risk of financing automobiles inventory, becomes less expensive. Additionally, the employment rate is projected to increase in the future, which would be another driver of the demand for vehicles.

Automobile dealers are progressively marketing new and pre-owned vehicles via the internet to meet the demand, allowing consumers to easily access vehicle reviews and compare models, specifications and prices through their respective websites. Many e-commerce sites also provide customers with the ability to study financing, insurance, leasing and warranty alternatives. This results in a better-informed buyer and can reduce the amount of in-person time required with dealers.

Americans are continuing to embrace products and services that offer a higher degree of convenience, and Vroom is increasingly positioning itself as the go-to online car dealership in the country.

The company is moving in the right direction

Vroom's online auto dealership platform is now using artificial intelligence and machine learning to facilitate the transformation of the new and pre-owned automobile business. Vroom announced on Dec. 15, 2020 that it entered into a deal to acquire CarStory, a pioneer in AI-powered analytics and digital services for automobile shopping, through the purchase of Vast Holdings, Inc. This transaction will help Vroom leverage its machine learning, data analytics and artificial intelligence capabilities. CarStory adds the most comprehensive and reliable view of predictive demand analysis in the industry to Vroom's nationwide e-commerce and automobile operations platform.

CarStory will help to accelerate automotive retail creativity as part of Vroom by categorizing, leveraging and sharing existing market data from a vast number of automotive channels, as well as providing automated retailing services to dealers, leading automotive financial services providers and national brands in automotive industry research. The CEO of Vroom, Paul Hennessey, commenting on this deal, said:


"At Vroom, we've built a platform made for scale and driven by data. As car buyers and sellers across the country increasingly turn to e-commerce solutions, CarStory will strengthen and extend the reach of our digital retailing platform, and together we will accelerate the transformation of the massive used auto industry."



The automobile dealership industry is ripe for changes as this is one of the very few business sectors that are yet to embrace digitalization. Vroom, arguably, is implementing some of the long-awaited changes to how consumers shop for new and used vehicles, and the company is well-positioned to become the frontrunner in transforming a billion-dollar industry.

Takeaway

Customers have shown a growing interest in shopping for vehicles online, and the global pandemic has accelerated this trend. Vroom is yet to turn profitable, but the company has made noteworthy progress in the last couple of years in my opinion. As online car dealerships become more relevant and widely accepted, Vroom stands to reap the rewards of investing millions of dollars to change the auto dealership industry.

Disclosure: The author does not own any shares mentioned in this article.

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This article first appeared on GuruFocus.

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