Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Used-car marketplace Vroom continued its march towards going public yesterday with the release of an updated IPO filing. The documents it filed provides pricing information for a somewhat odd public offering.
As a business, the heavily venture-backed Vroom is immature. It generates very little gross profit from its revenue (implying that it is unable to price its services attractively from a business perspective), and while it has managed consistent revenue growth, the company’s top-line gains (+39.3% in 2019) came at the price of rising unprofitability (+67.9% in 2019, on a net basis).
Even more, the firm’s numbers are deteriorating in Q2 due to COVID-19 and related disruptions. But, today’s public markets are prepared to move inversely to news, and Vroom, by going public as Q2 crawls in June, may manage to get its IPO done while stocks are back near record highs.
Let’s explore the company’s proposed $15 to $17 IPO price range and its implied valuation to see if we can parse what the company (and its investors) might be thinking.
Cheap, yet expensive
In its S-1/A filing, Vroom reports that it expects to price its IPO at between $15 and $17 per share, a range that may shift higher or lower depending on investor enthusiasm, or lack thereof. Vroom hopes to sell 18.75 million shares in its debut, generating gross proceeds of between $281.25 million and $318.75 million.
Its underwriting banks may buy 2.8125 million shares at the IPO price in the company’s first 30 days of being public, possibly boosting the firm’s IPO raise.
Discounting the underwriter’s option, Vroom anticipates 112,737,090 shares in its business existing after the IPO. This allows us to give the firm a simple valuation range between $1.69 billion and $1.91 billion.
Those valuation marks are somewhat attractive for Vroom, as they are each higher than its last private valuation. Indeed, as TechCrunch noted during coverage of the firm’s initial IPO filing, “Vroom most recently raised $254 million in December 2019, a Series H round that valued the company at around $1.5 billion.”
Vroom generated $375.8 million in revenue during the first quarter of 2020. Annualizing that rate gives the firm a run rate of $1.50 billion. This allows us to see that the firm is targeting a revenue multiple of 1.1x to 1.3x, give or take, with its current IPO pricing.
Given that you’ve heard about SaaS companies trading for 20x, 30x, even 40x revenue, those low multiples may appear cheap and thus alluring. They aren’t, not really. From that $375.8 million in Q1 2020 revenue, Vroom generated gross margin of just 4.9%. In short, the company’s revenue isn’t very profitable. SaaS revenue, in contrast, can generate gross margins north of 70%.
Which explains the company’s low targeted revenue multiple. The math becomes even more dicey when we recall that Vroom is struggling in the current quarter. It will likely do less revenue in Q2 than Q1. So the former startup doesn’t really have a run rate of $1.50 billion as we estimated; it’s lower than that.
This raises the company’s implied revenue multiple, making Vroom’s IPO more expensive than it first appeared. And as during pre-COVID-19 times the company was only able to grow sales by losing more money, it’s not as if the firm has a history of demonstrating lots of operating leverage in better times; why would things get better in the future?
So on one hand, Vroom can appear cheap if you view the numbers from a particular perspective. But with a second glance, things seem a bit worse, or more expensive.
Recalling our previous look at the company’s IPO, this excerpt from the company’s documentation remains critical:
Due to the inventory price reductions that began in late March, our demand returned to pre-COVID-19 levels, and we experienced robust e-commerce vehicle sales; however, those sales were at a greatly reduced gross profit per unit. During April 2020, we sold 2,880 e-commerce units and gross profit per unit was approximately $1,236, as compared to the 2,771 units we sold at $1,769 gross profit per unit in March 2020. Due to the significant reduction in our inventory through April 30, 2020, we expect material decreases in future unit sales, revenue and gross profit until we are able to return inventory levels to pre-COVID-19 levels.
Falling gross profit on a per-unit basis will harm the company’s already light operating leverage. And that, on the back of falling sales, implies one difficult Q2. So it makes sense why Vroom is going public now — do it before the Q2 numbers come out — but that doesn’t change the oddness of the company’s numbers.
More if it makes it to the next step in the IPO process.