- VRM stock has plunged over the last year
- Rapid spending growth is the company’s main problem
- Investors should wait for the company to show signs that it can control its spending before buying VRM stock
Vroom (NASDAQ:VRM) is a startup that sells cars online. Incredibly, VRM stock plunged from $54 on the day my first bullish column about it was published on June 30, 2020 to just $2.66 on the afternoon of March 17, 2022.
Of course, a number of factors — including multiple macro issues — caused the demise of VRM stock, which mostly occurred over the last 13 months. On Feb. 8, 2021, the shares were changing hands for close to $50.
But I think the company’s inability to control its costs was one of the most important reasons for the plunge of its shares. If Vroom can fix that issue, I believe that the shares are likely to rebound dramatically.
Consequently, if Vroom starts greatly decelerating its cost increases, investors should consider buying VRM stock.
Costs, Not Revenue, Have Been the Problem
Vroom’s annual sales jumped from $1.19 billion in 2019 to $1.36 billion in 2020 to $3.17 billion in 2021. So it’s clear that the auto retailer has been effectively growing its business. As a result, my prediction in my Sept. 14, 2020 column that “Vroom’s marketing efforts, as well as highly favorable macro trends, should boost the company over the longer term” was actually accurate, from a revenue perspective, at least.
However, when I wrote my last column on VRM stock, I guess that I should have been more worried about the retailer’s inability to meet demand in 2020.
That’s because, in hindsight, its failure to do so may have signaled inefficient and poor execution. I believe that now due to the huge spending increases that Vroom has racked up over the years. The company’s operating expenses surged from $191 million in 2019 to $250 million in 2020 to $560.7 million in 2021. And in the fourth quarter of 2021, its operating expenditures were $170 million. That’s more than double the $79.5 million that it spent during the same period a year earlier.
VRM Stock Should Get Help From Macro Factors
Several positive macro trends should help lower Vroom’s costs and raise its margins going forward. The company says that the performance of its reconditioning centers — where its automobiles are kept and made ready to sell — was negatively impacted by Covid-19 in Q4. With the pandemic easing, that problem should diminish.
And in February, Barron’s reported that: “Used-car prices have held steady for a month.” With the Federal Reserve (Fed) tightening interest rates, that trend is likely to continue going forward. Indeed, used car prices may even drop slightly in the months ahead. Of course, with Vroom’s used auto acquisition costs no longer jumping, its costs of revenue should be easier to control, putting upward pressure on its margins and downward pressure on its losses.
Since Vroom’s e-commerce gross profit per unit came in at $1,548 per unit last quarter, selling more vehicles should also put more upward pressure on its bottom line.
Vroom Has Potential, But Cost Cutting Has to Be Prioritized
The company’s strong revenue growth, along with its positive e-commerce gross profit per unit last quarter, shows that it has been able to grow effectively and that it could potentially become profitable.
But in order to accomplish that goal, it has to find a way to reduce the growth of its Sales, General, and Administrative (SG&A) spending. Vroom’s SG&A spending jumped from $185 million in 2019 to $245.5 million in 2020 to $547.8 million last year. And last quarter, its SG&A came in at $166.3 million, more than double $78.1 million that it spent during the same quarter in 2020.
Should You Buy VRM Stock?
Macro developments are likely to boost Vroom’s results going forward, and its price-sales ratio is a tiny o.46. Still, until the company gets its costs under control, its shares probably won’t get much love from large investors. Therefore, I recommend waiting for signs that the company can accomplish that goal before considering buying the shares.
On the date of publication, Larry Ramer 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.