Vroom IPO: Five things to know about the online used-car seller


Online used-car seller Vroom Inc. is aiming to raise more than $300 million in an initial public offering under the shadow of the coronavirus pandemic.

Vroom
VRM,

could benefit from the broader shift to online shopping accelerated by the pandemic. With the economic uncertainty and turmoil in the car industry, however, its business model could become more challenging. Vroom already has had to cut prices and its profit margins have shrunk.

“The market is placing a high value on next-generation companies that can thrive in a post-COVID economy,” said Matthew Kennedy, a senior IPO market strategist with Renaissance Capital, which manages IPO-focused ETFs. “Vroom falls into that category.”

Car dealerships are under pressure as consumers both delay big-ticket purchases and limit non-essential travel, if the dealerships are open at all, Kennedy said.

“However, tech-focused used car platforms like Vroom proved more resilient. Consumers are increasingly interested in shopping online for cars, and the COVID-19 outbreak (has) accelerated that trend.”

Kennedy points to the success of Carvana Co.
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-1.58%

shares, which have rebounded since March, when most of the U.S. went under shelter-in-place, public-health orders to slow the spread of the virus. Shares of Carvana, Vroom’s main competitor, are trading more than 600% above the company’s 2017 IPO price.

“That alone could drive interest in Vroom,” he said.

The IPO market has shown more activity in recent weeks, with the biggest deal of the year pricing at the higher end of its price range. Warner Music Group Corp. returned to public markets on Wednesday after nine years as a private company, raising $1.93 billion.

According to Renaissance, 35 IPOs have priced in 2020, a 42% drop so far from last year.

Here are five things to know about Vroom.

IPO terms suggest a more than billion-dollar valuation

Vroom on Monday set IPO terms, with a proposed price range of $15 to $17. The company is offering about 18.8 million shares in the IPO and is expected to have a market capitalization of around $1.92 billion if it prices at the higher end of that range.

Vroom’s IPO is expected to price June 10 after market close and the shares are expected to begin trading the following day.

Underwriters include Goldman Sachs, BofA Securities, and Allen & Co. The underwriters have a 30-day over-allotment option to buy up to 2.8 million additional Vroom shares. The company expects to trade on the Nasdaq under the symbol VRM.

Vroom is led by Paul Hennessy, who previously was Priceline.com chief executive and chief marketing officer of Booking.com, both owned by Booking Holdings Inc.
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Hennessy was named Vroom’s CEO in 2016.

Coronavirus impact

Despite the focus on online sales, Vroom was not immune to pandemic-related declines in business.

“The COVID-19 pandemic has impacted us in a number of ways, including an adverse impact on our e-commerce operations,” Vroom said in its prospectus.

Between March 11 and March 31, as most U.S. residents were told to remain indoors and nonessential businesses closed, online sales fell 15% as compared to the 20 days before March 11, the company said.

Starting in late March, Vroom cut vehicle prices to drive sales and quickly reduce inventory bought before the pandemic, and it also halted all vehicle acquisitions other than trade-ins, it said.

The strategy has worked, the company claimed, saying it “significantly” reduced inventory and, due to the price cuts, “our demand returned to pre-COVID-19 levels, and we experienced robust e-commerce vehicle sales.”

That came at a price, however: “Those sales were at a greatly reduced gross profit per unit, the company said.

Vroom has since resumed buying cars from auctions and individuals, but is focusing on “high-demand models” to get better margins, it said. Vroom plans to build up inventory “in the near term to return to and ultimately exceed pre-COVID-19 levels.”

To protect its balance sheet amid the pandemic, Vroom said it had reduced costs and furloughed about a third of its workforce in early May.

About 60% of the furloughed employees returned to work by the end of May, the company said. As of late April, Vroom had $156.4 million in cash and cash equivalents and $280.8 million available under its credit facility.

It has not turned a profit yet

Vroom has not been profitable since its start in 2012 and deficits have piled on to about $616 million as of March 31, the company said. In addition, losses have widened this year and dividends are nowhere in sight.

Net losses hit $143 million in 2019 and $41.1 million in the first quarter, compared with losses of $85.2 million for 2018 and $27.1 million in the first quarter of 2019, Vroom said.

Revenue rose 39% to $1.2 billion in 2019. For the three months ended March 31, sales rose 60% to $375.8 million, Vroom said.

Its long list of potential pitfalls, or risk factors, include “inability to reduce costs, acquire and appropriately price vehicle inventory, attract customers or identify and respond to emerging trends in the used car industry; slowing demand for used vehicles and our related value-added products; weakness in the automotive retail industry generally,” as well as increasing competition.

Vroom expects “to continue to incur losses as we invest in and strive to grow our business,” it said. It has to ramp up expenses with advertising and marketing as it builds its brand, continues to invest in technology, and expands. Being public will also come at a higher cost, as it will have to face “significant” legal, accounting and other expenses that it did not incur as a private company.

E-commerce gross profit per vehicle declined 24% last year as compared with 2018, and by 0.4% for the first quarter as compared with first quarter of 2019. “To reduce our losses, we will need to increase our gross profit per unit by lowering our costs per unit by, among other things, increasing efficiencies in reconditioning and logistics, which we may be unable to do,” it said.

Vroom also has said it does not expect to pay any dividends “for the foreseeable future.”

People may not be ready to give online car-shopping a try

The online market for used cars is a lot smaller than online markets for other consumer products.

One of the biggest hurdles is misgivings about buying a vehicle, usually a consumer’s largest one-time expense after buying a home or saving for a down payment, sight unseen.

Even often-derided interactions with car salespeople might be preferable for some, as is the ability to test-drive and examine the vehicles under consideration. Then there’s the inconvenience with returning or exchanging cars bought online.

“If the online market for vehicles does not continue to develop and grow, our business will not grow and our business, financial condition and results of operations could be materially and adversely affected,” Vroom said.

On the plus side, Vroom offers consumers access to thousands of vehicles, ready for perusal at any time, with pricing and financing information readily available, the company said. Vroom’s cars come from auctions, consumers, dealers, and rental-car companies.

The used-car industry “is highly fragmented with over 42,000 dealers and millions of peer-to-peer transactions … 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 at only 0.9%,” Vroom said.

It relies on several third parties

Vroom relies on several third-party companies to do the bulk of its job.

That include its customer-service team, which handles “the substantial majority” of inquiries, sales, purchases and financing of vehicles in Vroom’s business.

“Thus, the customer experience center is fundamental to the success of our business. As a result, the success of our business and our customer experience is partially dependent on a third party over which we have limited control,” the company said.

Some of its “reconditioning” business, or the sprucing up of vehicles before going on sale, is also handled by third parties in some cases, Vroom said.



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Congress could kick China listings off U.S. stock exchanges, but it won’t happen overnight


The bill rushed unanimously through the U.S. Senate and spun into the news cycle as if it were a certainty.

As the thinking goes, the House and then the president will shuffle this legislation into law, forcing Chinese companies listed on U.S. exchanges to play by the same transparency rules as those from other parts of the world.


Senate bill would require Chinese companies to establish that they are not owned or controlled by a foreign government and submit to an audit that the Public Company Accounting Oversight Board can review.

Normally, powerful entities would make the passage of this “anti-China” bill an uphill battle. The Nasdaq
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the NYSE
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the Securities and Exchange Commission and Wall Street in general largely oppose the move and the yanking of billions of dollars from their pocketbooks. And House Speaker Nancy Pelosi said Thursday that her side of the Capitol was willing to look at the issue, but no vote was promised.

But the legislation comes amid a striking U.S. political competition of sorts to show who is toughest on China — and during the crucial few months before the presidential election.

Also from Tanner Brown:U.S.-China relations are bad and getting worse, with major ramifications for trade and investment — and the U.S.’s presidential election

Even if a variation of the bill does eventually pass, already-listed firms will have three years to comply. That is ample time for China to increase the attractiveness of its own bourses, and for Chinese companies to prepare for a relatively smooth landing back home — likely Hong Kong for larger already-listed companies, and the growth boards for smaller startups, according to Peking University’s Paul Gillis.

China has already opened more attractive doors for public fundraising. After the decade-old Nasdaq-like ChiNext welcomed tech startups in Shenzhen, neighboring Shanghai learned from the pains and successes of that venture and unveiled the Science and Technology Innovation board, or Star Market, last year. Its niche is profit-losing tech-focused startups that show promise and otherwise might list in New York.

As of now, some 200 Chinese companies are listed in the U.S. — some in ways more transparent than others — possess a total market value of more than $1.8 trillion, according to the U.S.-China Economic and Security Review Commission.

Their departure would represent a big flight of capital from U.S. exchanges, a diminution of U.S. tax revenue, a loss to investors and, some would argue, a prestige hit for Wall Street as the center of global finance.

But it would also mean those willing to buy into U.S.-listed firms from China wouldn’t be duped like they were recently by Luckin Coffee, whose shares
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resumed trading this week after a six-week freeze. Luckin’s American depositary receipts tumbled 36% on Wednesday from their closing price on April 6, after which trading was halted by Nasdaq. The stock plummeted 89% in the first quarter of this year. It ended the week at $1.38, against a closing level above $40 as recently as March 6.

Nasdaq has informed the onetime Starbucks
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rival that it faces delisting after it disclosed that some employees fabricated $300 million in sales. Luckin is appealing the decision, but if it’s delisted investors would lose essentially all equity, a “wipeout” for which one analyst warned investors to prepare.

A Luckin Coffee location in Beijing on Jan. 15, before the fast-expanding chain — billed as a potential Starbucks slayer — was engulfed by controversy.


Bloomberg

Opinion:Luckin Coffee shows how risky Chinese IPOs can be, but investors are just not listening

“A lot of these companies, by the way, have already had scandals and cost investors a lot of money, because of their failure to be transparent in their reporting,” White House economic adviser Larry Kudlow told Fox News. “The Chinese government forbids that kind of transparency.”

The painful delisting decision may still be bothering Wall Street and the SEC, but lawmakers appear ready for action.

“We want investors to understand what they’re investing in,” said Sen. John Kennedy, a Louisiana Republican and a co-sponsor of the Senate bill. “And those reports have to be accurate or you get in a lot of trouble.”

Tanner Brown covers China for MarketWatch and Barron’s.



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