Four (4) Reasons To Buy Vroom (NYSE:VRM) Before It Reports Earnings

The Used Car Market Is Hot

Vroom (NYSE:VRM) is slated to report earnings for the first time as a public company today after the bell and the expectations are high. And why not? Indications from other used car operators, the digitally-oriented ones, in particular, all point to robust sales, rising profits, and accelerated growth in the second half. With the stock up more than 50% from its IPO barely two months ago, the question quickly becomes “is this stock a buy” and “should I buy it before it releases earnings?”. It’s hard to say exactly what will happen after the company reports but let me assure you, there are many reasons to think this stock is a screaming buy.

This Is Why You Should Own Vroom

1) Buy Vroom, Inc Because The Peer Group Is Breaking Out - Reports from Vroom’s peer group are fantastic. There are some mixed results within the reports to be sure but when you dig into the details there is nothing not to like. Carmax (NYSE:KMX), the industry leader, beat on the top and bottom lines and then raised guidance. Up and comer Carvana (NYSE:CVNA) reported a slight miss on the top line but who cares, revenue grew more than 13% from the previous year.

Brick&Mortar dealer Sonic Automotive (NYSE:SAH) (who also has a solid digital presence) also missed slightly on the top line but EPS grew more than 100%. EPS growth is attributable to higher margins associated with used car sales, a pillar of Vroom’s business. More importantly, Cars.com (NYSE:CARS), the most comparable company to Vroom, popped 16% after it reported a stunning top and bottom-line beat. In all cases, shares of these stocks are moving higher and on the verge of a break out if not already trading at new highs.

2) The Analysts, Neutral’s As Good As Bullish For Vroom, Inc. - In the short two months this company has been public it has racked up no fewer than 10 analysts ratings. Now, seven (7) of them are only neutral in magnitude but you need to take that figure with a grain of salt. From the sell-side perspective, a neutral rating on a brand new issue is as good as a buy. For most, this means a hold or equal weight rating which ultimately means they and their clients need to own some. Things will get really interesting once the company delivers its report and proves it can deliver. That’s when we might start seeing the analysts get more bullish and begin building larger positions.

JP Morgan analysts issued a very positive note on the entire sector about two weeks ago. According to them, the fundamental conditions supporting the industry are skewed to the upside. "We think the COVID-19 pandemic and Fed actions have ironically made the sector fundamentally more attractive with a much-improved cost structure, better balance sheet profile and potential for larger well-capitalized players ... that are uniquely positioned to participate and extract value from the move to omnichannel offerings in a fragmented space."

3) There Is A Bull Market In Used Car Prices - There is a massive tailwind driving the used car market called rising prices. The demand for higher-value, lower-ticket price vehicles, and declining inventory has resulted in a strong uptick in pricing. According to data from the Manheim Used Vehicle Index used car prices rose nearly 6% in July on a month-to-month basis and are up 12.5% from last year. Based on the metrics, it looks like prices will at least hold their current levels through the end of the year.

"Used vehicle prices have recovered as the supply of used vehicles has come down. Using a rolling seven-day estimate of used retail days’ supply based on vAuto data, we see that used retail supply peaked at 115 days on April 8. Normal used retail supply is about 44 days’ supply. It ended July at 34 days, so much lower than normal.

4) The Technical Picture Is Bullish For Vroom, Inc. - The technical picture for this stock is bullish. Not only has it staged a solid rally over the past 30 days, but it’s also been moving steadily higher since the IPO and now consolidating at new highs. Assuming the rally from mid-July to the present is a bullish flag pole and the consolidation between $64 and $68 the beginnings of a bullish flag the potential for gains is enormous. The flagpole is good for a $20 dollar continuation that could easily put price action above $84 or about +31% from Tuesday’s closing price.