By seemingly most measures, auto dealership Vroom (VRM) – which specializes in convenient online transactions and vehicle delivery services – appears to be a no-brainer entity to avoid. Since the start of the year, VRM stock dropped over 19% of market value at a time when several other enterprises jumped higher despite pressing economic challenges. Nevertheless, the consensus opinion of the dealership is moderately bullish.
This then begs the question, why? Generally, analysts and pundits that are optimistic about Vroom pulling itself together point to the convenience factor, along with the company’s innovative business model and marketing prowess. Still, VRM stock faces significant challenges stemming from a loss of relevance amid the transitioning post-pandemic economy. Therefore, prospective investors need to exercise extreme caution before even thinking about Vroom.
Analysts Surprisingly Have Love for VRM Stock
Look up Barchart’s main profile of Vroom and you’re immediately greeted with its Technical Opinion indicator, which flashes as a strong sell. Specifically, the algorithm states that VRM stock rates as a 100% sell. There’s not much nuance here other than to say that VRM approaches oversold territory. Thus, it’s possible that it could – as a reactionary move – swing higher.
Still, a 100% sell is a 100% sell. Despite the ominous implications, Wall Street analysts carry a consensus moderate buy view on VRM stock. This assessment breaks down as two strong buys and four holds. Interestingly, three months ago, the consensus view sat as a hold. Therefore, it’s been steadily earning the experts’ trust. Again, it begs the question, why?
In particular, JMP Securities analyst Andrew Boone maintained a buy rating on VRM stock with a price target of $1 on April 25 of this year. Given the closing price of 75 cents on Thursday, VRM carries upside potential of over 33%.
During Vroom’s first quarter of 2021 earnings call, Boone inquired about shifting advertising strategies and improved consumer-sourced vehicle engagement. Such questions align with why other analysts and daring investors appreciate Vroom, particularly the innovation undergirding the brand that seeks to disrupt the traditional dealership industry.
While Vroom’s online approach to vehicle sales speaks the language of the all-digital Generation Z consumer, options traders don’t appear to be biting on the narrative. Following the close of the midweek session, VRM stock represented a “highlight” on Barchart’s screener for unusual stock options volume.
Specifically, total volume for VRM hit 24,570 contracts against open interest of 88,870. Further, the delta between the Wednesday session volume and the one-month average volume came out to 889.13%. Drilling down, put volume hit 23,419 contracts while call volume reached only 1,151. This pairing yielded a put/call volume ratio of 20.35, on paper dramatically favoring the bears.
Vroom Has the Right Idea But the Pricing Dynamic Doesn’t Work
What might tempt onlookers to consider VRM stock centers on the otherwise compelling digitalization approach. While digitalization might not matter as much to Gen X and older cohorts, it’s everything to millennials and especially Gen Z. The latter group essentially forced a rewrite in terms of marketing strategies and for good reason. It’s the first age group fully reared on digital technologies and internet connectivity.
By logical deduction, Gen Z prefers conducting various transactions online and increasingly through smartphone apps. On surface level, this framework seems to benefit VRM stock. After all, the underlying enterprise could theoretically disrupt traditional dealerships through having every component of the retail automotive value chain being conducted online.
Unfortunately, those conveniences carry a cost premium. Look at it this way – a consumer can forego these conveniences and secure a better deal on their vehicles. Further, with the Federal Reserve continuing to raise interest rates amid stubbornly high inflation, consumers need to find deals wherever they can get them.
Understandably, the traditional dealership offers a relatively unpleasant experience: first, consumers must physically drive there and second, they must haggle with salespeople that are constantly playing mind games with their victims – excuse me – customers, yes, customers.
However, money is a great motivator. Even for your typical Gen Z brat that communicates more fluently with text messages and emojis than through verbalization, the broader cash crunch may spark a mentality shift. Therefore, because of the current economic conditions, the disrupter may be disrupting itself.
Money Talks
Ultimately, VRM stock and its forward viability will come down to consumer sentiment. Should the economy rebound from its woes and if the Fed cures all ambiguities, it’s possible that Vroom can swing higher. That it deploys innovative marketing isn’t in doubt. Nevertheless, the consumer must agree to pay for the underlying conveniences. I just don’t see that happening in this environment.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
