The challenge is on for franchised dealers as Vroom, Carvana stock ratings upgraded

On Tuesday, Goldman Sachs upgraded online auto retailers Vroom Inc and Carvana Co from ‘Hold’ to ‘Buy’ status and raised the price targets for both companies. After a challenging past two quarters for the auto industry as a whole, analysts at Goldman Sachs expect that the online sales giants are poised to increase their market share in the coming months. 

‘Sharp pullbacks’ in September have marked both stocks with Vroom (VRM) dipping below the S&P 500 index and Carvana (CVNA) declining from 222.98 per share on Sept 2 to 173.68 on Sept 21, but analyst Daniel Powell sees the retraction as an opportunity for investors. 

Powell says, “With shares down meaningfully from 1-Sept (CVNA -27%, VRM -37% as of Sept 18), Manheim reporting retail and wholesale supply loosening, indications of inventory building, and a re-acceleration in app downloads, we believe the current pullback warrants stepping in with risk/reward skewed meaningfully to the upside for both of these secular winners.”

Although share prices have gone down, business trends have been going up. Vroom has grown their inventory exponentially over the past six months from 1,430 units in April 2020 to 9,885 in August of the same year. Carvana has seen the number of app downloads growing over the same period of the share price slide, indicating a surge in customer engagement. Carvana also announced Tuesday that they expect record-setting Q3 performance.

Powell set a new target price for both stocks on the upgrade – $60 per share for Vroom, up from $52, and $205 per share for Carvana, up from $178.  

Where Growth is Expected 

The Goldman Sachs analyst also provided insight into where growth is expected for Carvana and Vroom. It’s expected that online car sales are around for the long term and will grow, sparked by the growth seen in the midst of the pandemic. Powel believes that both Carvana and Vroom will find their additional sales taking away business from the 40,000-plus dealers who sell less than 500 used vehicles in a year. 

An upgrade from ‘Hold’ to ‘Buy’ is seen as a powerful marker for a company’s health and longevity, and it can generate a boost in funding from additional investors. For Carvana and Vroom, there’s still room to outperform the market and bump up to a ‘Strong Buy’ in the future.  

Dealers Should Be Alert 

With the confidence of Wall Street behind a few powerful online auto sellers, the used car dealers mentioned previously should be on guard. Whether independent used car retailers or franchised dealerships, online-only sellers are taking aim at the clientele.

Competing for car shoppers who are confident purchasing online is becoming an increasingly precise task. From sales policies such as clearly defined return terms and convenient online F&I processes, a brick-and-mortar dealer has to morph their practices to offer similar services if customers require. 

Small to medium dealers will likely not attempt to match online-only retailers in inventory levels since Carvana is toeing the 10,000-unit line, but the shopping experience is where online car sales fall flat. The inability to test drive and the missing interaction with a live person may be where dealers can take advantage of an in-person experience.

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