IPO Preview: Vroom Begins Drive Toward IPO

IPOStreet

Vroom (VRM) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement, although the final figure may be higher.

The firm operates an online marketplace for used car buying and selling in the United States.

VRM looks to be well-positioned to take advantage of a potential large shift in consumer buying behavior toward online marketplaces in a post-pandemic economic environment although the firm is generating high operating losses.

New York, NY-based Vroom was founded to source high demand used automobiles in the U.S. and sell them to buyers via its ecommerce website.

Management is led by CEO Paul Hennessy, who has been with the firm since June 2016 and was previously in several leadership roles at Booking Holdings, a global online travel company where he served most recently as CEO of Priceline.com.

The company’s primary offerings include:

  • Automobile sales
  • Vehicle reconditioning services
  • Third party financing
  • Other value add products and services

Vroom has received at least $900 million from investors including L Catterton, General Catalyst, T. Rowe Price Funds, Auto Holdings and Cascade Investment.

The firm acquires customers through a mix of online marketing and its Sell Us Your Car centers.

VRM sources high demand used cars through dealerships, wholesalers, and end users.

Selling, G&A expenses as a percentage of total revenue have been stable as revenues have increased.

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, has increased to 2.4x in the most recent reporting period.

According to a market research report by McKinsey & Company, the market is significantly larger than that for new cars.

This represents a forecast The U.S. used car market also has been more resilient to external economic shocks.

Additionally, used vehicles are becoming 'younger' in age due to greater 'off-lease supply and newer certified pre owned vehicle' inventories.

The report estimates 'that the number of used vehicles three years old or less will increase from 51 percent of the total in 2017 to about 60 percent in 2022.

Major competitive vendors include:

  • Carvana (CVNA)
  • Cars.com (CARS)
  • TrueCar (TRUE)
  • Numerous small publications

Management says its system offers a wide range of integrated services that buyers and sellers want and that other services do not provide the complete capabilities it can offer.

Vroom’s recent financial results can be summarized as follows:

  • Sharply increased topline revenue
  • Growing gross profit but uneven gross margin
  • Increasing operating losses
  • Reduced cash used in operations

Below are the firm’s recent operating results:

vroompl
Source: Vroom S-1 Filing

As of March 31, 2020, Vroom had $169.8 million in cash and $262.2 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was negative ($207.8 million).

Vroom intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO for ‘general corporate purposes, including advertising and marketing, technology development, working capital, operating expenses and capital expenditures.’

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, BofA Securities, Allen & Company, Wells Fargo Securities, Stifel, William Blair, Baird, JMP Securities, and Wedbush Securities.

Commentary

Vroom is seeking public investment capital at a delicate time for the firm.

The company’s historical financials show accelerating revenue growth but high and increasing operating losses.

Selling, G&A expenses as a percentage of total revenue have been stable; its Selling, G&A efficiency rate has improved.

However, the effect of the Covid19 pandemic on car sales has been severe, at least in the short term. But how severely has it affected the used car marketplace and for how long will the negative effects endure?

The market opportunity for selling used cars online in the U.S. is extremely large while the fleet of available inventory is getting younger and better over time.

The firm’s major competitor, Carvana (CVNA), has seen its stock dip sharply but bounce back in recent weeks as some investors view the online model as benefiting in a post-pandemic economy due to an expected lower preference of buyers going to retail locations.

Vroom is similarly situated to take advantage of shifts in consumer buying behavior toward online service offerings.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 78.7% since their IPO. This is a top-tier performance for all major underwriters during the period.

Vroom will no doubt seek to go public before revealing its Q2 2020 results which are likely fairly negative despite being an online portal.

When we learn more details about management’s assumptions on pricing and valuation of the IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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