Updated: Nov 24, 2020
James Chapter 5, verses 7-8 state, “Therefore be patient, brethren, until the coming of the Lord. See how the farmer waits for the precious fruit of the earth, waiting patiently for it until it receives the early and latter rain. You also be patient. Establish your hearts, for the coming of the Lord is at hand.” Oh boy, patience. This is an area I probably fail at every day of my life in some way, but I thankfully am reminded through this verse to continue to exercise patience for God. It’s never easy, but I find that when patience is practiced and found, it yields much more positive results for all things.
E-commerce continues to make its inroads into many facets of traditional physical retail sales. The two big ones that are on the horizon include new and existing home purchases and new and used vehicle sales. In both cases, investors are going to need to exercise patience as the businesses in these areas are at very early stages. For the used vehicle e-commerce market, there are four key players to pay attention to:
CarMax, Inc. (KMX)
Carvana Co. (CVNA)
Vroom, Inc. (VRM)
Shift Technologies, Inc. (SFT)
I have built a position in Vroom as my pick out these four companies.
So, the question is why did I pick Vroom? It’s quite simple and a good example of the tools I’ve built to make such decisions. As an investor, the two most important metrics to grow my stake in any company over time are revenues and cash flow. Specifically, I want to see strong top-line revenue growth and corresponding stable and/or increasing cash flow growth. The challenge is that these four companies have only exhibited strong revenue growth. Ah yes, patience will be very important here.
Since cash flows are not reliable at this point, my attention has been focused on revenue performance and corresponding valuation by Enterprise Value, or EV to revenues – EV/Revenue. Concurrently, I have been paying close attention to cash positions on the Balance Sheet, or B/S, and the rate of cash burn against leverage. For the future, I will be looking at when I should be expecting cash flows to materialize. Through this approach, Vroom clearly stands out based on value and financial strength.
CarMax is the largest retailer of used car sales including wholesale in the U.S. CarMax’s omnichannel business model has been hit harder versus the predominantly e-commerce-based models of Carvana, Vroom and Shift during COVID. All three companies have also experienced substantially faster revenue growth, and this trend is projected to continue in the near-term. By next year estimates, and in a span of five years, Carvana, Vroom and Shift will have grown their revenues to 50% of CarMax's, increasing by 1,700%.
CarMax has displayed an inability to consistently generate positive cash flows, is steeped in debt, and with slower growth projected in the near-term is the weakest play out of the four. Vroom is discounted heavily versus Carvana by EV/Revenue, and Shift still needs to scale its business model successfully to become a formidable competitor. Vroom is positioned the best of the remaining three as its current cash position, with no debt, affords the company a solid runway to continue to scale, while both Carvana and Shift will likely need to raise more capital over the next 24 months.