Gearing Up for IPO: Vroom S-1 Key Takeaways (My TLDR) and Comparison to Carvana

On Tuesday, Vroom filed to IPO on the Nasdaq as “VRM”. Vroom is an online used car dealer that allows customers to buy and sell their cars completely online. It's a very similar business model to its competitor, Carvana (NYSE: CVNA).

Vroom was founded in 2013, only 1 year after Carvana, but its financial profile lags behind Carvana's more than that. Vroom has shown decent growth in revenue and units sold, but margins were declining even before Covid. The company says it has consciously let margins deteriorate at the expense of growth over the past few quarters, however, revenue only grew 39% in 2019. For context, Carvana has more than doubled revenue every year for the past 6 years while improving margins. Carvana was always able to rely on improving unit economics to sell investors despite not being profitable, but Vroom will need to find other points to key in on.

Vroom IPO'd on June 9 at $22 per share, raising $468 million and valuing the company at $2.5 billion. The valuation represents 2.1x Vroom's 2019 revenue. For reference, Carvana IPO'd in 2017 at a $2 billion valuation, representing 4.5x LTM revenue at the time. (Updated to include Vroom's IPO price, capital raised, and valuation.)

Vroom vs Carvana

Operational Differences from Carvana

• Has Physical Dealership. Vroom acquired Texas Direct Auto, a dealer in Texas in 2015 and now sells vehicles out of that physical location. Carvana has no physical dealerships. It has 24 “vending machines”, but those are only for pickup.

• Only 1 Reconditioning Center. Vroom operates 1 vehicle reconditioning center and relies on 13 others that are owned and operated by third parties. Carvana owns all 8 of its reconditioning centers.

• Outsources Delivery Logistics. Vroom relies mostly on third party delivery providers. Carvana’s built an in-house delivery logistics network and uses a combination of owned and leased car haulers.

• Works with Financing Partners. Vroom offers car financing through third party lenders and makes some revenue from each deal. Carvana is the lender for all of its auto financings and services the loans, as it wants to own the whole car buying experience.

Besides these points, Vroom and Carvana are eerily similar. Given Vroom was founded just 1 year after Carvana, I compared some key metrics of Carvana vs Vroom on a “years since inception” basis to make it apples to apples. The following table shows years 2017 and 2018 for Carvana, and 2018 and 2019 for Vroom. Slicing the data this way, Vroom still meaningfully trails Carvana in all metrics except S&M as a percentage of revenue.

My Key Takeaways (TLDR) on Vroom's S-1 Prospectus

Overview

• Value Proposition: Vroom is “A better way to buy and sell vehicles”

• The company qualifies as an “emerging growth company” because it filed confidentially in December when its revenue was still under $1.07 billion. Therefore, it only needs to disclose 2 years of financials

• Revealed that ⅓ of its workforce has recently been placed on furlough

Market Backdrop

• The US used car market is a $841 billion market

• It’s massively fragmented, with the leading player only holding 1.8% and top 100 holding 8.6%

• The used car buying process is notoriously unpleasant, meaning people are looking for better ways to buy

• eCommerce penetration is only 0.9%

Income Statement

• Segment Revenue: The business reports 3 revenue segments (% of 2019 revenue)

• eCommerce (50%): Cars sold to consumers online

• Texas Direct Auto, TDA (33%): Cars sold in their 1 physical location

• Wholesale (17%): Cars sold at wholesale auction because they did not meet Vroom consumer car standards

• TDA Physical Location Sales: Sales on cars sold in their only physical location in Texas have better gross margins than eCommerce sales because they don’t need to handle shipping

• Gross Margin Decline: Overall gross margins have declined for 5 out of the last 8 quarters, and was 4.6% in the quarter ended 12/31/19. (Carvana’s was 12.9% in the same period)

• Gross Profit per Unit: 2019 eCommerce GPU was $1,696 per car, down from 2018 GPU of $2,242

• Vehicle vs Product Gross Profit: On the average eCommerce car, Vroom makes $1,100 on selling the car and another $580 on selling add-on products like financing, warranty and insurance

Cash and Debt

• $156M in cash as of 4/30/20

• $170M outstanding on floorplan facility with capacity of $450M as of 4/30/20

Covid-19 Impact

• Sales started to get hit hard the last 3 weeks of March

• As a response, Vroom reduced vehicle prices until demand reached pre-Covid levels

• The company also stopped acquiring new vehicles during that time

Fun fact: The word “drive” was used 118 times, many of which were opportune puns.

About Vroom

Vroom is an end-to-end ecommerce platform that offers a better way to buy and sell used vehicles. Vroom’s scalable, data driven technology brings all phases of the vehicle buying and selling process to consumers wherever they are. With a deep commitment to creating an exceptional experience that delights its customers, Vroom offers an extensive selection of vehicles, transparent pricing, competitive financing, and at home pick-up and delivery. Vroom also operates the Texas Direct Auto brand.

About the Author

Bonnie Young runs the Amplified blog. She shares her insights on market trends and interviews founders that are shaking up the tech scene. Please reach out to her on LinkedIn with your questions and feedback.