If your only perspective on used-car retailer and e-commerce service Vroom (NASDAQ:VRM) is its performance in the charts, your instinct would likely be that VRM stock is a toxic asset. The arithmetical evidence is difficult to avoid. Over the last five days since the close of the May 3 session, VRM has lost almost 7% of market value. During the trailing month, it tanked about 46%, culminating in a staggering year-to-date loss of 86%.
You know those famous Russian nesting dolls (called Matryoshka dolls)? It’s like that but with volatility, as every new look seems to bring ghastlier comparisons.
Still, one of the fundamental factors that does make VRM stock interesting is the necessity of the underlying business. Sure, used-car prices have been ridiculous throughout most of the new normal. But that ridiculousness is tied to both soaring inflation and more pertinently to the automotive market global supply chain disruptions. Therefore, people have to buy cars, especially because Americans have been holding onto their cars for longer than ever.
At a certain point, when cars break down, it might make more economic sense to just get a new — or new-to-you — car. Further, it’s possible that as society returns to normalization, pandemic-related initiatives like work from home may come to an end. In that case, vehicle sales may rise, which would represent an indirect benefit to VRM stock. So, when contrarians see the short percentage of float of 40.4% for Vroom, they might be sensing a short-squeeze opportunity. It’s a high-risk venture, of course, but it might be game on for those bold enough to try it.
However, the issue for Vroom is that it really failed to capitalize during the boom time for used cars. For instance, VRM stock peaked in August 2020, whereas rival Carvana (NYSE:CVNA) peaked almost exactly one year later. Therefore, it’s hard to imagine that VRM stock will succeed in a much more contested environment.
Ultimately, conservative investors should stay on the sidelines. Vroom has not proven its viability during the good times, so it probably won’t be a great buy in the bad times. However, for speculators, any bit of somewhat encouraging news for its May 9 earnings disclosure could spike up VRM stock as bearish traders scramble to cover their positions.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.