IPO Launch: Vroom Speeds To $300 Million IPO
Vroom (VRM) has filed to raise $300 million in an IPO of its common stock, per an amended registration statement.
The company has developed an online website to enable buyers and sellers of used automobiles to conduct sale & purchase transactions.
VRM is growing sharply and I believe will see only a temporary sales drop in Q2 - Q3 2020 resulting from the Covid19 pandemic.
My opinion on the IPO is a BUY at up to $16.00 per share.
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 headed 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 from 1.8x to 2.4x in the most recent reporting period.
According to a market research report by McKinsey & Company, the market for used car sales is significantly larger than that for new cars.
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 or related firms include:
- 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 relevant financial metrics derived from the firm’s registration statement:
Source: Company registration statement
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).
VRM intends to sell 18.75 million shares of common stock at a midpoint price of $16.00 per share for gross proceeds of approximately $300.0 million, not including the sale of customary underwriter options.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.6 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 16.63%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds 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 available here.
Listed underwriters of the IPO are Goldman Sachs, BofA Securities, Allen & Company, Wells Fargo Securities, Stifel, William Blair, Baird, JMP Securities, and Wedbush Securities.
VRM is seeking public investment to fund its expansion plans.
The company’s financials show a firm who’s revenue growth has been accelerating, at least through the end of Q1 2020.
However, there is a big question mark as to the trajectory of that growth as the Covid19 pandemic has negatively affected car sales.
This activity will likely show up in Q2’s results. Additionally, the firm is generating high and increasing operating losses.
Sales and marketing expenses as a percentage of total revenue have been stable and the firm’s sales & marketing efficiency has increased as sales have grown, a positive signal.
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 98.1% since their IPO. This is a top-tier performance for all major underwriters during the period.
As a comparable-based valuation, Vroom’s management is asking investors to pay what is essentially a discount to that of publicly held Carvana, another online purveyor of used cars in the U.S.
A question for investors interested in Vroom is to what extent do you think the firm will be harmed by the Covid19 pandemic and the resulting degree of drop in sales?
I think the drop will be material but temporary. Vroom appears to be a growth rocket ship and the IPO looks reasonably priced compared to Carvana.
Additionally, VRM has a solid balance sheet without the heavy debt usually associated with private equity involvement (L Catterton).
My opinion on the IPO is a BUY at up to $16.00 per share.
Expected IPO Pricing Date: June 10, 2020.
(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. I may purchase a small position in Vroom in the open market, post-IPO. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)