Online used-car seller Vroom Inc. has filed confidentially for an initial public offering it hopes to stage in June, according to people familiar with its plans, a move that will test the ice-cold tech IPO market.
Vroom hopes to draft behind rival Carvana Co., a better-known online car seller whose shares have jumped sevenfold since its 2017 IPO. After falling 80% during the broader market’s selloff in March, Carvana’s shares have recovered to trade near record levels.
With social-distancing measures keeping consumers at home, online car sellers could benefit at the expense of traditional dealers, if buyers opt for a digital-shopping and at-home delivery experience over visiting dealer lots.
Market volatility this year has largely quieted the market for IPOs across many industries in the U.S. In the first two weeks of April, only two companies went public, raising a few hundred million dollars, according to data provider Dealogic.
And only one tech company has gone public in 2020, according to data from IPO expert Jay Ritter, a finance professor at the University of Florida. Some of last year’s offerings have performed poorly, including ride-hailing companies Uber Technologies Inc. and Lyft Inc. We Co., parent of office-sharing company WeWork, nearly collapsed after pulling its IPO last fall.
Vroom’s target IPO valuation isn’t clear. It raised $250 million in a private financing round in December that valued the company at $1.5 billion.
For Vroom, the challenge is trying to carve out a spot in a market where internet economics often skew toward the top player in a given market that achieves massive scale, for instance in search and social networking.
Carvana is much larger, grew faster last year, and has gross-profit margins twice as large as Vroom’s, according to people familiar with Vroom’s private financial data.
Last fall, Vroom projected 2019 sales of $1.1 billion, a 30% increase from 2018. Carvana’s 2019 sales of $3.9 billion nearly doubled its 2018 figure of $2 billion. And while Carvana sells most of its cars online, Vroom—while primarily known for selling online—sold more than half of its cars via a traditional dealership business that it owns or on the wholesale car market. That distinction is important because the stock market has valued Carvana at a multiple of revenue significantly higher than traditional used-car dealers, according to FactSet data.
Vroom hopes the market will look forward to 2021, when it believes sales will top $2 billion, mostly coming from its online unit, said one of the people familiar with the company. That would be a decline from the $3.2 billion it had been projecting for next year as of last fall, but would still give the market an opportunity to value the company above its prior funding round valuation if it gets a multiple closer to Carvana’s.
Vroom had forecast 2019 gross profits of $75 million, about 7% of sales. Carvana reported $500 million of gross profit for a margin of 13%. Both companies spend huge sums on advertising to grab market share, pushing their bottom lines into the red.
Vroom appears to have grown its online-sales segment more quickly than Carvana throughout 2020, according to estimates from research firm YipitData, especially in the first few weeks of April, when Carvana’s business shrank amid pandemic-related shutdowns while Vroom managed meaningful sales gains versus the same period last year. Vroom appeared to discount cars more heavily after the pandemic hit, Yipit says.
Vroom hopes there will be room for multiple online players to take sales away from traditional used-car sellers, a person familiar with the company said.
Vroom boasts a management team led by Chairman Bob Mylod, the longtime chief financial officer of Booking Holdings Inc. when it was still known as Priceline. He brought in another Priceline alum, Paul Hennessy, to be Vroom’s chief executive.
Goldman Sachs Group Inc. is leading Vroom’s public offering and will be joined by firms including Allen & Co., also a major Vroom investor; Wells Fargo & Co.; Bank of America Corp. and Stifel Financial Corp., people familiar with the matter said.