When the IPO lockup period for Vroom (VRM) ends today, December 7th, its pre-IPO shareholders and company insiders will have the opportunity to sell nearly 94 million previously-outstanding shares.

Source: S-1/A

This is in sharp contrast to the 21.2 million shares offered by the IPO. The potential for a sudden increase in stock flooding into the secondary market could cause a sharp, short-term downturn in share price. Aggressive, risk-tolerant investors should consider shorting shares of VRM during today's trading session.

Source: S-1/A

Business Overview: Provider of Electronic Platform for Buying and Selling Vehicles

Vroom operates an electronic platform, which the company calls Vision Build, that allows consumers to buy and sell used vehicles across the end-to-end e-commerce platform. The platform also offers the ability to research vehicles and finance transactions.

The platform has a wide array of functionalities to facilitate transactions in the used vehicle marketplace. Vroom offers an alternative to traditional used car dealerships and the peer-to-peer marketplace. In its SEC filings, Vroom indicates the platform is highly intuitive and personalized. It offers the ability to research thousands of vehicles and prices, In addition, users can connect with real-time financing options and arrange for pick-up and delivery of the vehicle.

In addition, Vroom maintains an inventory of used vehicles. It leverages machine learning and data science to optimize its inventory and operations, enhance user experience, calibrate pricing, and improve inventory sales velocity.

Vroom’s e-commerce business represents approximately 49% of revenue (2019). It sources its inventory from dealers, consumers, auctions, and rental car companies. Then the company reconditions the automobiles and sells them over its app and website.

The company’s Texas Direct Auto business represents approximately 33% of revenue (2019), and it is Vroom’s only physical retail auto location, which also operates its owned vehicle reconditioning center.

The company notes that the U.S. used vehicle marketplace generates around $841 billion in sales annually. The segment includes millions of peer-to-peer sales and more than 42,000 car dealers. Vroom’s strategy includes increasing its penetration into the market by improving quality and satisfaction in the used car segment.

Vroom has recorded impressive revenue growth. Sales increased from approximately $855 million in 2018 to approximately $1.2 billion last year. Some company watchers expect sales to reach around $1.7 billion in 2020, helped by the COVID19 pandemic and an increase in consumers shopping online to avoid personal contact. Vroom seems well positioned to optimize their position with its end-to-end electronic platform, financing options, transparent pricing, and contact-free pick-up and delivery nationwide.

Vroom maintains its headquarters in New York City, and the company has approximately 800 employees.

Financial Highlights

Vroom reported third-quarter financial highlights for the period ending September 30, 2020:

• Ecommerce revenue grew to $221.8 million for an increase of 24.5%

• Ecommerce vehicle revenue grew to $214.0 million for an increase of 22.6%

• Ecommerce product revenue grew to $7.8 million for an increase of 117%

• Ecommerce gross profit rose to $19.3 million for an increase of 120%

• Ecommerce vehicle gross profit rose to $11.5 million for an increase of 122.1%

• Ecommerce product gross profit grew to $7.8 million for an increase of 117%

Management

CEO Paul Hennessy has served in his position since June 2016, and he is a member of the board of directors. He previously held senior positions at Booking Holdings, Pricelinecom, and Booking.com. Mr. Hennessy serves on the board of directors for Shutterstock. He earned a B.S. in Marketing Management at Dominican College. In addition, he earned an MBA from Long Island University. The company’s SEC filing notes that Mr. Hennessy’s first car was a Pontiac Catalina.

CFO David Jones has served in his position since November 2018. His previous experience comes from senior financial positions at Iconix Brand Group, Penske Automotive Group, and Andersen LLP. He earned a bachelor degree in business administration in accounting from Seton Hall University. The company’s SEC filing notes that Mr. Jones’s first car was a 1968 Pontiac GTO.

Company bios sourced from S-1/A and company website.

Competition: Carvana, Carmax, and Autonation

Vroom’s main competitors include Carvana (CVNA), Carmax (KMX), Autonation (AN), and Hertz Car Sales (HTZ). Other competitors include KBB, TrueCar (TRUE), CarGurus (CARG), Amazon (AMZN), eBay (EBAY), Edmunds, Autotraders, Cars.com (CARS), and Autobytel.

Early Market Performance

The underwriters priced the IPO at $22 per share. The stock opened on its first day of trading at $40.25. Although the price dipped occasionally, it reached a high of $73.97 on September 1, 2020. From there, the share price began a steady decline to reach a low of $33.50 on November 16. Currently, the stock trades around $33 to $35.

Conclusion: Short Shares Today

When the VRM IPO lockup expires today, pre-IPO shareholders and company insiders will be able to sell nearly 94 million of previously-restricted shares for the first time. We believe that they will be eager to do so - VRM has a 53% return from IPO. Any significant sales could cause a sharp, short-term downturn in share price. Risk-tolerant, aggressive investors should consider shorting shares of VRM today and covering short positions during the December 8th and 9th trading sessions.