Carvana Vs. Vroom: Jefferies Picks A Winner

Jefferies initiated coverage of Vroom Inc VRM and Carvana Co CVNA on Friday and said one online car sales stock is a better investment opportunity than the other.

The Analyst: Jefferies analyst John Colantuoni initiated coverage of Vroom with a Hold rating and $38 target and Carvana with a Buy rating and $300 target.

The Thesis: The used vehicle space is a $550-billion market “ripe for disruption, and Carvana will likely be a major long-term winner, Colantuoni said in the initiation note.

Carvana is also one of the few stocks in the market that will be a secular winner from the 2020 pandemic, the analyst said. 

Jefferies' $300 target suggests significant near-term upside, but he said the stock could double if the company’s market share trends continue.

“We estimate ~60% revenue CAGR and ~25% upside to 2022 consensus if CVNA's historical market share progression continues into the future.”  

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While Vroom is exposed to the same $550-billion market, Colantuoni said the company’s recent revenue growth slowdown will likely make it difficult for Vroom to impress Wall Street in coming quarters.

“A recent precipitous drop in revenue growth (-5% in 3Q20 vs +77% in 4Q19) at such an early stage in the company's lifecycle reduces our confidence in VRM's ability to meet lofty forward expectations,” the analyst said. 

Benzinga’s Take: Given that neither company is profitable, it’s hard to argue with Carvana’s 40.9% revenue growth last quarter versus Vroom’s 5% revenue decline.

Conditions have been extremely favorable for online car sales this year, which makes Vroom’s revenue growth problems even more concerning for investors.