Cornerstone Crumbs: Vroom Game Is Afoot

"The Lord bless you and keep you;

The Lord make His face shine upon you,

And be gracious to you;

The Lord lift up His countenance upon you,

And give you peace."

Numbers 6: 24-26

Today we got a little color from JP Morgan on their coverage on Vroom, Inc. (VRM). Here's what they had to say:

Analyst Rajat Gupta downgraded Vroom to Neutral from Overweight with a price target of $15, down from $30. The analyst downgraded digital used vehicle retail names to reflect prolonged labor and capacity constraints. These will delay scalability and a re-rating of the shares. Investor skepticism is unlikely to change in the current "tough capacity ramp and peak used car pricing backdrop". The analyst believes Vroom remains a "misunderstood story," though he acknowledges that the catalyst to re-rating on fundamentals is likely to "remain elusive for the time being."

Very interesting to see the contradictory statements and logic for Vroom. All while Vroom's PTs continue to rise as the company is now estimated to generate $4.6 billion in Revenue for 2022. The exercise of dropping the PT was pretty subjective as they trimmed it from their prior level to just above where Vroom is trading today. The impact on Vroom's trading has been felt as the modest rally towards $14 has been suppressed.

The question investors need to be asking themselves is that if Vroom's business model is misunderstood, and labor and capacity constraints are being felt in the short-term, what happens once these hurdles are cleared? This is easy, the EV/Revenue multiple will go back towards a more realistic multiple - I'm modeling 2 times, a 55% discount to that of Carvana, Inc. (CVNA) today.

If Vroom is able to generate the $12-$13 billion in Revenue by 2025, let's just assume a $12.5 billion midpoint, then the SP assuming a 2 times EV/Revenue multiple would yield a SP at $200. If we apply this same multiple for next year, the SP would be trading north of $65. For reference, Vroom's EV/Revenue multiple finished 2020 at 3.5 times.

So I'll ask investors again, what will happen to Vroom's SP once they clear the short-term hurdles that they are facing today? Another way to look at this is that Carvana is trading in a more depressed fashion today, and is approaching the $12 billion Revenue market in 2021. Still the company sports a 4.5 times EV/Revenue multiple so I continue to believe that I am being very conservative by affording Vroom a 2 times EV/Revenue multiple by 2025.

Vroom may have been justified in seeing a correction from 2020, but today's valuation is far too suppressed, trading in-line and today, below Shift Technologies (SFT). I reiterate my PT for 2022 year-end of $66.20.

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