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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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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