Growth stocks have been hit hard, very hard, and for good reason. Those valuations were ridiculous and you know it. The FED turning off the printer and increasing the rate was just the turning point. As interest rates go up all the debt companies have accrued will get more and more expensive to service. The companies with foresight raised money when debt was cheap, but many were still taken down in the recent rout.

There is a silver lining (for anyone who still has capital left), many companies who are well positioned to take advantage of the market conditions have been collateral damage to macro conditions and shorts and are extremely mis-priced, which have created outsized opportunities. I believe VRM is one of those companies.

The Company

Vroom specializes in buying and selling cars online. They were founded in 2012 and the IPO was in 2020 @$22/Share. Recently Vroom has been on the growth warpath- between 2020 and 2021 they grew nearly 2.5x in revenues, they acquired a captive financing company, acquired an AI-analytics company, and have grown their distribution centers. That type of growth in that timeframe is extremely inefficient (more on that later) and burns cash fast…not so great in an environment where rates are rising. However Vroom raised 550 million dollars through dirt cheap bonds, protecting itself (for now) from any need to dilute their stock or raise more capital, and from higher interest rates.

The big question is can they stop burning cash? Can they become a profitable company before they run out of money? The negative narrative the past 6 months is that they will not be able to survive on the cash that they have (FUD). As you can see the EPS and cash burn are not pretty, but there is a glimmer of hope. The most recent earnings results showed promise with a 30% beat and a downward trend in cash burn for the first time in a while. In that same quarter Carvana posted a MASSIVE EPS miss.

	Q1 21'	Q2 21'	Q3 21'	Q4 21'	Q1 22'
Cash Burn (1000's)	-$77,189	-$65,807	-$98,122	-$129,793	-$103,056
EPS	-$0.57	-$0.48	-$0.70	-$0.94	-$0.71

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So what are the headwinds and tailwinds approaching Vroom? Let’s take a look:

Headwinds:

· Chip/Car Shortage– The most obvious one. We’ve all heard how microchips are in short supply and it is affecting all supply chains, cars in particular. We are also learning that car purchases are fairly inelastic, but not so much that you can charge more for a used car vs. a new car. This caused the middlemen (dealerships) to take the biggest hit on used cars. Sellers saw the prices and demanded the same increase and it got to a point where if dealerships (online brick & mortar) put the same profit dollars, it would be more than a new car. Once new cars increase in production this issue will iron itself out. Not a question of if but when. If that when stretches for too long it will continue to choke the used car market. Some people think that this is good for the used car market but all it does is inflate the price and suck profits. No new cars means everyone is holding onto their old cars longer, consumers and businesses. I believe this to be the most difficult headwind, but is not in Vrooms control. Again not a question of if but when. I also believe this will give Vroom an advantage by figuring out profit in a tight landscape which will give exponential benefits when the outlook improves.

· Inflation– Like the drunk uncle that only shows up once a decade, inflation wreaks havoc in a very short amount of time. Specifically for Vroom this made growth more difficult and costly (hopefully they turned the boat early enough). It also squeezed profits of the used car markets further and increased costs of reconditioning cars. It seems inflation may be taking a breather, for now.

· Dollar Value- Some thought the FED printer going brrrrrrrrr would decimate the value of the dollar but with all other banks also printing it was moot. Now the dollar is skyrocketing with other asset classes in flux. A higher dollar impacts imports, and used cars are imported to go to auction in the US on a regular basis. It is not a huge number, but when supply is this stretched anything will make an impact.

· GPPU– The gross profit per unit was fairly abysmal the last 2 quarters. Combine a fast growth directive with an inflationary environment and you end up with no profit. If they had to grow then that means they needed cars at all costs. Story after story of Vroom offering the most for cars from individuals in the name of growth. This is where you start to see how inefficient the growth was, and how potentially easy it will be to show strong change in the coming months.

· Macro conditions long term– Market has been pummeled, maybe there is a break in the medium term, however the geopolitical issues seem to be here to stay and that could spell trouble for the markets. On a long enough timeline these conditions will improve.

· Licensing – Vroom has had trouble licensing cars and you can see it in the reviews. This was caused by a combination of (again) triple digit growth and the inherent fact that the licensing process sucks, and since Vroom is nationwide there are different processes to hone in and try to optimize.

Tailwinds

· Headwinds reversing- If headwinds that are not in Vrooms control start to ease (Chips, Inflation, DXY, Geopolitical) then I would expect Vroom to catch some extra movement since the move down was so violent and the latest earnings report was extremely positive.

· Low efficiency bar – The C-Team recently highlighted that they plan to pivot to profit from growth going forward. With how much growth there was, I suspect there will be very easy levers of efficiency to pull.

o Stopping expansion capex- Easy, quick, effective. Less marketing and no new operations because its time to work on making the existing operations better. I have a suspicion that this has already happened and that was how they shaved 30% off the EPS loss.

o Operations- When in expansion mode making things efficient is almost the last thing you want.
You WANT to have extra employees to move on new work quick, you move on to the next project before the previous one is perfected. The point is there is a lot of meat on the efficiency bone. The new CEO highlighted a simple point of displaying cars closest to the customer first to lower delivery costs… I mean talk about low hanging fruit!

· Non-growth initiative- Right now this simple change will be a massive difference maker. No more over paying for inventory. No more issues reconditioning (less throughput means smaller operations, no need to pay a premium for 3rd party reconditioning). It also solves the problem of the Adesa acquisition by Carvana (if it actually goes through). These are just some of the very easy changes they can make to pivot to profit. Will they lose revenue? Sure, Vroom definitely over clubbed growth and burned some cash in the process. All that is moot as long as profit is viable. 2bn in sales with .10 cent EPS loss or even profit is a better picture than 5bn in sales and the sale EPS losses.

· Product expansion – When you are not focused on market growth you can turn some attention to product growth. The car is just there to reel you in, almost a loss leader, and the real profit is in the add-ons. Extended warranties, service warranties, internal financing, white glove services, maybe even a leasing subscription service. Some of these are already in play, Vroom just completed their acquisition of UACC, a car financing company. This tailwind may take a bit longer to play out, but with how big the used car market is, the potential is massive. That being said improving existing products profitability should be achievable in the short term.

· Carvana– Carvana is wading through a steaming pile of debt, to the point that it could be in real trouble. It seems that they overshot and grew too big too fast by using an incredible amount of debt. Double whammy..ouchie. They are also almost 4 times the size of Vroom and will have that much more trouble turning the ship to perform in the new economic environment that we are in. This is great for Vroom who could have simply been lucky to be the right size at the right time; when the pivot was needed. This means that any negative news for Carvana could be a catalyst for Vroom. Will the Adesa acquisition fall through? Is bankruptcy imminent with the debt they have?

· Macro conditions short/medium term– It seems that the past several weeks have been stretched to the down side and we could get some relief ahead. Pure speculation, but hopefully at some point it will turn.

After the most recent earnings call, I noticed that VRM saw the writing on the wall earlier and acted late last year. They hired Tom Shortt as COO and recently announced his promotion to CEO on the call. It is apparent now that they brought on Tom Shortt to pivot VRM from growth to profitability and they likely started much earlier than some think. I looked back at the announcement and Tom even hinted at it- “I am excited to join the Vroom team as COO and look forward to using my experience in supply chain management and business transformation to help Vroom build on its success, execute its growth plan and drive operational improvements across the organization,” said Mr. Shortt.” Just like war time and peace time leaders, there are growth CEOs and profit CEOs, and Tom is a juggernaut in efficiency. With experience optimizing the most complex supply chains like Walmart and Home Depot, they seem to have the right guy at the helm for what the company needs the most.

So we now have a company that is pivoting from extreme growth to profit. From experience I can tell you that when there is extreme growth, the efficiency is fairly easy to improve drastically at first (think 80/20 rule). Think of how low the bar was for efficiencies when the only goal was growth. Low hanging fruit like that can cause fast movement in profitability, and even faster movement in the stock, especially one as mis-priced as VRM.

I’ve been following VRM for quite some time and the difference between the Q4 21’ and the Q1 22’ earnings call was night and day, I would recommend listening to them. The Q1 22’ was extremely positive, well structured, and gave exactly the guidance investors were looking for.

Tom Shortt also gave guidance that they expect to have ~500 million in unrestricted cash by year end. If that comes to fruition that would indicate that a strong curve to profitability is in effect, and that 500 million will be enough to get the company to profit.

Now equipped with an operational oriented CEO, 800million in cash and a profit directive, Vroom could not only get to profit, but leapfrog Carvana in the process. Should this really be priced for bankruptcy?

Stock Price/Valuation

As you can see there are some challenges to overcome, but I believe Vroom is in the right place size wise and financially to get to profit and become a major player. And with the company valuated where it currently is, the downside is limited. The market potential is absolutely monstruous (more on this below)

As I write this the price is 1.50. This gives Vroom:

· A market valuation of 210m

· Price to Book of .22 (no that decimal is not a typo)

· Price to Revenue of .05

· Net Debt of 615m

Even after the destruction of Carvana stock price the numbers are still surprisingly divergent:

· A market valuation of 7.8b

· Price to Book of 11.28

· Price to Revenue of .24

· Net debt of 6.75b

I look at this and one would think “there must be a reason”. There must be a reason Vroom is priced at a QUARTER of it’s book value? Yes the cash burn will lower the value quarter by quarter, however compared to other growth stocks this has been hit much harder. P/B of PTON is 2.64; ABNB is 15.18; COIN is 2; ROKU is 4.55; BYND is 13.33. Even after the massive declines they are still worth at least 2x book. 2X book would put VRM at approximately $13.64.

At a simple book value of 1 VRM would trade at price of $7.14. At year end they estimate to have 500m in cash; which equates to $3.67 per share BEFORE ASSETS!

Well then maybe the growth potential is limited I think….but no. The TAM in 2022 is 160b, of which Vroom only has 2% of. The market also grows 3.4 percent per year and hey guess what- there is a small trend called online shopping. Rona made people comfortable buying something as costly as a car completely online and that trend will only get bigger. The big players in the market barely make up 20% of the market share. The industry is still EXTREMELY fragmented with a ton of small dealerships lots. Do you really think in 5 years Vroom won’t be drinking their milkshake?! This is Amazon vs Brick and Mortar in the early 2000’s. You may think online car buying won’t last or it is too difficult, but you will be wrong, and Vroom will be 100x by then.

Lastly take a look at the weekly chart- since August 21’ there have only been 7 green candles (candles that are miniscule vs the red)! I’ve been trading for a decade and I have never seen anything like this. They say the market is never a straight line, well this is the exception to the rule! If this is short manipulation, the move back up could be just as violent.

If I was evaluating this company in my professional capacity, value would be much higher than 200m. It should be at least 1.5bn until the end of the year where more clarity is seen.

Short Potential

Let me be clear, this outsized opportunity is based on a combination of fundamentals and macro conditions, but there is a 35% short position on the stock which can create a better risk profile for an investment squeeze or not. The stock is heavily owned by institutions; with how this has been viciously dropped one has to assume a large portion of those institutional shares were loaned out, making the 35% higher in actuality. The short sale availability has gone down over the past 7 days, and the cost to borrow has gone up.

TL:DR

You have a company that is extremely oversold because of short manipulation, macro conditions, FUD narrative and industry conditions. This same company is in fact the best positioned in the industry to take advantage of the macro changes. So not only is this oversold, it should be valued higher than book because of future potential.

Between the right management now in place, the cash and asset value, and the future potential, this seems like one of the safest places to park cash (hell you are buying cash at a discount at this price). I have moved most of my liquid assets to this singular stock. I see little to no risk bag holding this, I sleep like a baby.

Final Notes

– THIS IS NOT FINANCIAL ADVICE I AM SIMPLY SHARING MY DD FOR THIS COMPANY

– There is an investor event May 26 that will detail how Vroom will get to profit. Could be a catalyst.

– L50,000 @ 2.78