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A JPMorgan (NYSE:JPM) analyst downgraded shares of Vroom (NASDAQ:VRM) and Shift Technologies, Inc. (NASDAQ:SFT) to Underweight from Neutral on a challenging macro backdrop.
The analyst sees continued macro headwinds facing the used car industry. Moreover, within the same industry, he prefers companies “that have ample liquidity and/or diversity in their business to navigate an uncertain macro backdrop.”
The downgrade call comes as VRM shares trade over 80% lower YTD while Shift stock is down almost 70%.
“Taking a fresh look after both companies have laid out individual go-forward plans, there is clearly no easy/quick fix or turnaround due to which we struggle with the investment case in the near to medium-term. Both companies are now ex-growth, burning ~35-40% of Mcap/quarter in cash flow and trading at ~4x 2023E EV/GP, a premium to many FCF generating and higher growth e-comm peers,” he said in a client note.
The analyst also took note of updated business plans at both companies with the goal of achieving an FCF breakeven before they ran out of money.
However, he doesn’t see this “as a reason to own the shares until unit economics can be proven along with scalability, which we do not see management teams pursuing until 2H23 or 2024.”
VRM stock price is down 3.8% in premarket Monday while SFT shares are trading 3.2% in the red.
