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It’s been a great year for both initial public offerings and also e-commerce stocks. Vroom (NASDAQ:VRM) stock arrived at just the right time, as the company benefits from both factors. Not surprisingly, Vroom’s June IPO was a success. Since Vroom stock started trading, shares are up by around 21%.
That’s a respectable run by any measure, though it trails many other tech stocks in this sizzling market environment.
Does Vroom has more upside? Don’t mistake Vroom for a cheap value play. At 6x sales, the stock is at a discount compared to other high-priced tech stocks, but the valuation is still up there for a retailer. And Vroom doesn’t yet generate profits on an accounting basis either.
However, in this current booming market for online commerce companies, Vroom looks cheap by comparison. It’s certainly undervalued when you put it side to side with rival Carvana (NYSE:CVNA).
Online Marketplaces Have Huge Tailwinds
While tech stocks in general are flying, one category in particular is booming, and that’s digital marketplaces. Think about the dynamics here. For an online platform to work, you need an ample supply of both buyers and sellers. The novel coronavirus has managed to create more of both.
Fewer people want to buy used cars from a traditional dealer this year. The auto lots may be shut down, and even if they’re offering normal service, there are health and sanitary concerns. Meanwhile, folks wanting to sell a car may not want to haggle in person either. Thus, more people are looking to both buy and sell online.
This creates network effects. As more cars are listed on Vroom, the quality of the service improves for buyers. And as more buyers congregate on Vroom, sellers see listings get action quickly and come to prefer Vroom as their favorite method for selling vehicles.
It’s a virtuous cycle that should result in the leader taking most of the marketplace. We’ve seen specific niche digital marketplaces, such as Etsy (NASDAQ:ETSY) blast off this year. The winner of the auto space should be no different.
Vroom Versus Carvana
Some noted Tesla (NASDAQ:TSLA) short sellers, such as Montana Skeptic, have also criticized Carvana. This has arguably put Carvana into the cult stock category, as people with strong opinions on Tesla have migrated into Carvana shares as well. Seemingly, with Tesla soaring, the same dynamic has played out in Carvana, with the headstrong bears getting run over.
Unfortunately for Carvana shareholders, once the momentum reverses, they’ll see that they’ve made a big mistake. I don’t have an opinion on whether or not Carvana is doing any of the things the short sellers accuse it of. I will say, however, that Carvana’s stock is up 500% off its recent lows. In general, you’re pushing your luck if you don’t sell a controversial battleground stock like Carvana after a huge move.
Vroom, by contrast, set its IPO price at $22 and saw the stock rise quickly to $50. It’s now at $58. That’s an increase, but it’s not an exponential run. Vroom, unlike Carvana, is still establishing its identity as a public company. As traders warm to the story, Vroom could enjoy a huge surge like Carvana, but without all the associated drama and controversy.
Not Enough Inventory, Not A Huge Problem
One issue that has held Vroom back is a lack of inventory. Vroom didn’t choose to buy vehicles aggressively in the second quarter, as Vroom played defense for the economic downturn. This caused it to slip behind Carvana a bit, and in retrospect, that wasn’t the right decision. Despite the dismal economy, used car sales remained hot. And now, it’s getting hard to replenish inventory as the car market is tight nationally.
Obviously, it’s not ideal to run out of cars to sell, particularly at a moment like this when demand is at historical levels. It’s hardly a blemish on Vroom’s long-term business model that demand for cars exceeds supply, however. Remember, the economy is going through its worst downturn in ages. Unemployment is sky-high. Yet one of Vroom’s big issues now is that it doesn’t have enough cars to sell.
In the grand scheme of things, that’s nothing. Investors should be thankful that car demand is high and that the company isn’t stuck with a ton of unsold inventory, as often happens to retailers in recessions. This is hardly the worst setback that could have hit Vroom in 2020.
Vroom Stock Verdict
I don’t own Vroom stock now, and that’s not going to change anytime soon. Most of these tech stocks – particularly in e-commerce – have gotten really expensive. Sure, the sector is booming thanks to the pandemic, but it’s fully priced into the stocks at this point.
That said, clearly these are hot names and momentum is strong. I know a bunch of readers are going to want to be long, despite the stretched valuations. If so, we can affirmatively say that Vroom is much more compelling than Carvana. If you’re going to own one of these in the auto space, Vroom is the better play.
Just keep an eye on valuations in general. After a big run for these online marketplace stocks, a correction should be coming later this year. That could be the time to take a more aggressive position in Vroom stock going forward.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.