Timing is everything.
Vroom priced an initial public offering this week, and shares shot up 118% to $47.90 each in their first day of trading, sending the company’s valuation soaring above $5 billion.
“Vroom is an innovative, end-to-end e-commerce platform that is transforming the used-vehicle industry by offering a better way to buy and a better way to sell used vehicles,” according to the company’s IPO filing with the Securities and Exchange Commission. “We are deeply committed to creating an exceptional experience for our customers.”
The corporate description sounds nearly identical to the one in Carvana’s IPO filing three years ago. “Carvana is a leading e-commerce platform for buying used cars,” the company wrote in its April 2017 S-1 filing. “We are transforming the used-car buying experience by giving consumers what they want — a wide selection, great value and quality, transparent pricing and a simple, no-pressure transaction. Each element of our business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.”
Yet Carvana’s stock [Nasdaq: CVNA] fell 26% in its trading debut, dropping to $11.10 per share from an IPO price of $15. Why the divergent fates for the two online marketplaces? Both companies sell used vehicles online that they source from auctions, consumers, rental car companies and dealers. Both have investments from Ally Financial — Carvana in the form of a $2 billion loan purchase program, and Vroom in the form of a $450 million floorplan line.
Differences in the economic and lending landscapes shaped the two companies’ IPOs. In 2017, new vehicles were favored, with sales on track to surpass 17 million units for the third straight year. Wholesale values were on the upswing, which pressured used-car sales.
Further, the U.S. IPO market was saturated; 174 companies went public, up 55% year over year. And, perhaps most importantly, online vehicle purchasing was unpopular. Though 83% of car shoppers were ready to complete one step toward their vehicle purchase online before entering the dealership, eight in 10 consumers said they would never purchase a car without a test drive, and seven in 10 said they would never purchase a car without physically seeing it first, according to a Cox Automotive study at the time.
By comparison, the U.S. IPO market ground to a near halt in March in the wake of the COVID-19 pandemic, and has only started to heat up in recent weeks. Used-car sales have been outpacing new-car sales as consumers seek to limit monthly payments amid economic uncertainty. And in a survey conducted by CarGurus after the onset of the pandemic, 61% of respondents said they were open to buying vehicles online, as compared with 32% previously.
While Carvana and Vroom appear on the surface to operate nearly identical platforms, Vroom’s financing structure hinges on relationships with mega-lenders whose combined portfolios exceeded $200 billion as of yearend 2019, according to Big Wheels Auto Finance. Aside from the Ally floorplan, Vroom operates a co-branded finance arm with JPMorgan Chase Bank — launched in April — and has lending partnerships with Capital One Auto Finance, Santander Consumer USA and Truist.
On the other hand, Carvana — which largely finances its own loans — has a head start on Vroom, having accrued a $3.3 billion portfolio, according to Big Wheels. As of March 31, Carvana had 33,570 vehicles available on its website, compared with 5,107 for Vroom, and 6.8 million average monthly visitors to Vroom’s 947,014.
But Vroom has plans to use its newfound capital to bolster marketing efforts. Last month, the company entered into an agreement with Rocket Auto LLC that provides for the launch of an e-commerce platform under the “Rocket Auto” brand for the marketing and sale of vehicles directly to consumers. Vroom also has registered trademarks in Canada, Mexico and Peru, with pending applications to register the trademark in several other jurisdictions, according to the S-1.
And while many lenders are struggling with layoffs and reduced origination volume through the pandemic, perhaps COVID was a blessing in disguise for Vroom. On May 31, the company hired back 60% of the employees it had furloughed May 3. Consumers’ expanded interest in online purchases, coupled with Vroom’s contact-free vehicle delivery and pickup procedures, likely spurred investors to snatch up shares.
It took about 10 months for Carvana’s stock to surpass the $100-per-share mark, but at its current rate, Vroom’s stock will hit that milestone within a few weeks.
Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the same quality networking and education as past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com.
