Tales from the Filings: Dude, Where's My Equity?
The markets are closed for the week so pour yourself a beverage and enjoy some stock market story time.
Disclaimer: This is not financial advice, we do not hold any of the discussed companies long or short. None of us even have a finance degree and we are definitely not licensed to give advice in any financial markets. If we need to tell you this isn’t financial advice again, for real, on a Substack named Bullshit Hunting? You should probably just go ahead and see yourself out.
Go on, shoo! Don’t let the door hit ya where the good Lord split ya!
In the late winter of 2020 and early spring of 2021, an anonymous financial analyst and I were hunting around for short selling ideas while bantering over the phone about how insane the world had become. At that time Special Purpose Acquisition Companies1 (SPACs) were all the rave.
Also known as “blank-check” companies (which should sound about as investor-safe as a “genital vice”) they allowed numerous companies to simply marry large buckets of existing money sloshing around in the markets to their own shitty businesses while sidestepping the due diligence of an IPO.
Of course SPACs became hotspots of fraud2 and criminality3 because that’s exactly what happens when you give a market participant the ability to sidestep due diligence. This is why we can’t have nice things, you see?
It’s why home inspections are so important. Home inspections are a form of personal asset due diligence that many of you very much care is done properly. Your life and financial security quite literally may depend on it.
It always seems funny to me that investors of all sizes generally don’t give a fuck about doing quality due diligence in the stock market in the same way as they protect the asset they sleep underneath. Even when their equity portfolio’s value may be completely asymmetric to the value of their home. Yeesh, I thought y’all were capitalists.
Market psychology man, it’s a whole vibe.
A Brief Journey We’ll Take Together
My homie and I would often page through a “SPAC calendar”, which detail any upcoming or recently closed SPAC transactions. It was always an opportunity for us to have a good chuckle and to find potential short targets to get into our research pipeline.
On this particular day in 2021, we landed on a company called Vroom4, an online used car retailer headquartered in Stafford, Texas, USA.
Take a breath.
Now pause for a moment and let’s just do a little group exercise together
When you read the words “used car” what comes to mind? Go on. Close your eyes (don’t touch me though or anyone else, for that matter5) and think about it. Great. Now exhale. Release a cleansing fart if you need to.
Now, whatever process you just imagined, which I doubt was a rosy or a fun one, mentally teleport it to the other side of the country. Physically away from you where you can’t actually see the car, smell the car, talk to someone on the phone reliably. You can’t stroll down and test drive it.
For all you know the doors have fallen off and there’s a full film crew shooting orgies in the back of it. For all you know, when they’re done, they’re just gonna bolt new doors on, fire a spritz of Febreze in the air like the starting gun at the Biohazard Olympics, slap that unit on a flat-deck and finally, send it off down the highway to you.
Jesus. I mean, it sounds fun and all but no thanks.
This is exactly how you should approach investing and fundamental research. Does the business even make sense or do you feel yucky? Does it make you laugh in all the wrong ways?
Just like with dating, you should listen to your gut.
And your butt.
I digress…let’s get back to the story.
Using our group exercise, we can see that viewing, buying, financing, shipping and taking ownership of a car, all via the Internet might sound really fun and easy. As you can imagine this dreamy idea can quickly turn into a fucking nightmare with a high-value asset chasing you around your dreams with knife-hands.
What if your car is damaged? What if you’ve traded in your vehicle to Vroom or someone else, they picked up your old one and haven’t delivered your new one? How are you going to get to work?
Without ever looking at a filing or reading anything, this business already sounds like it could have a whole bunch of risks and issues that could impact consumers.
Perhaps we should go see what the consumers say.
Consumer Product? Do Consumer Research.
It turns out our guts and butts were right. While studying consumer reviews and behaviour may seem silly, or like it may not provide good “edge” in your fundamental research, I vehemently disagree. I propose consumer complaint research for every financial due diligence project where the end product or service might come within a country mile of a human being.
I have seen more short-focused leads come from consumer complaints websites than any Ivy-league educated, shaved ape running a $2,000/month bee-boop machine ever has6.
In 2021, if an investor would have read Better Business Bureau (BBB)7 reviews for Vroom, they would have spotted all kinds of problems. In fact, the BBB is saying it right up front that there were problems identified in 2020 that became worse over time. That’s what I believe y’all call a “trend” in finance whereas BBB calls it a “Pattern of Complaint”.
Last time I checked a Gregorian calendar, 2020 (chronologically speaking) was before 2021. Which means no one was paying attention to the people who actually spend money with Vroom: the consumers.
Go on with your quants, bud. Get down with machine learning models. I’ll stick with my gut and common sense research. I also drive a car, so I understand the process.
This single BBB warning later ballooned to three alerts8 and warnings including government enforcement actions. We learned through FOIA that a nearly every state in the USA had opened lawsuits against Vroom from their various attorney general or consumer affairs offices. Who could have possibly predicted that?
We chuckled and my homie affectionately codenamed Vroom, “Dude, Where’s My Car?”, after we read and meticulously categorized hundreds of complaints of undelivered and damaged vehicles from consumer review websites and social media.
We then did our own data collection and analyzed how Vroom’s inventory moved in and out. We analyzed their peers. We did all the things.
This puppy *slaps Vroom’s hood and watches a side mirror fall off* has more red flags than a guy holding a fish on a Tinder profile.
Stephen Hawking Would Be Really Mad
That brings us to used car inventory pricing chart that was included in a mindless report, published April 19, 2021, by Bloomberg Intelligence. Their analysts, after exiting their cryo-chamber that morning, perhaps a bit slow from eating their organic, artisanal, life-extending, piss-infused granola salad for breakfast, may not have seen something screaming at them in their smooth faces.
In hot neon pink, no less.
Doesn’t something look really strange to you about that chart?
Are you currently wearing a Patagonia vest over a $400.00 Kashmir sweater, bud? Take it off, it’s only going to get in the way. Put it away with your MBA from Wharton where it belongs.
What in the sweet, jumping, jiggle-fuck is that pink line doing exactly?
It looks like a sine wave.
A well-studied, common part of physics and mathematics and it stuck out like a sore thumb to me and my colleague. Sine waves are something we were all forced to learn in elementary, middle and high school in most countries. You know, because, for example a held note on an electric piano is an example of a sine wave. You’ve seen ‘em too, so it might have stuck out to you right away like it did for us.
The thing is that they shouldn’t happen in places of randomness and unpredictability like the public stock market or in price movements of used vehicles during a pandemic. The key thing here is that if you have a sine wave occurring in a market, then you can easily predict the price movements of the assets. A car is the second highest valued asset behind a home for a consumer. Let that marinate for a moment.
A potential arbitrage would have been for an investor (and maybe someone did) to look at that chart and go: I’ll buy cars in bulk from Vroom in one of those sine-wave-valleys and sell them to Carvana and others that have demand. All of these online retailers have wholesale arrangements and as you’ll see, there would have been plenty of financial incentive for someone to do it.
As marked above by our shit shovelling stickmen, Vroom had an estimated listed inventory of 15,963 vehicles with an “Average vehicle selling price per ecommerce unit” of $25,648.00. If we do some gorilla-math, we deduct the gross profit per unit of $1,765.00 and then we have a rough estimate of $23,883.00 per vehicle for a cost of inventory. Multiply it by the estimated listed inventory and we have $381-million USD in inventory. Or so. Give or take prolly a few here and there. It’s a metric fuck-ton, either way and not far off of what they say their inventory is valued at in their filings: $423,647,000.00.9
That’s hundreds of millions of dollars in used card inventory on their lots, being detailed, repaired or being moved on their trucks at any given moment.
This “listed” inventory number only went up over time as they began to have difficulties clearing inventory (due to consumer complaints, of course) and the time that a vehicle stayed on their lots increased. This is the death spiral of a used car dealership, online, offline, big or small.
Hundreds of millions in used car assets that have a very predictable pricing pattern at a time when the used car market was going apeshit during the pandemic.
An asset in demand. A predictable pattern. Isn’t that cute.
Vroom was opportunity missed on all sides, which makes it fun to analyze with hindsight, right? That’s why post-mortems on projects and investments is so important and why we do them at work all the time.
Conclusion
What does this all mean?
It meant that Vroom was using a computer to algorithmically move their used car prices, unpinned to the underlying asset or competition in the market. Something their peers did not appear to be doing at the same time, sometimes with the same vehicles even. Worse yet, Vroom coupled this whack-a-doodle pricing with atrocious customer service which any car dealership knows is the lifeblood of long-term profitability, not the first transaction alone.
Car sales require expertise, experience and market knowledge. A human touch backed by data science and financial analytics.
Not the other way around.
Vroom, fatally, disagreed and instead decided to make waves (zing!) in the industry by leaning into a mindless robots with no experience or human touch. No not Bloomberg, you meanies. The algorithm!
Vroom lauded this pricing and data science robot with a section in their 2020 10-K humorously titled: “Relentless Focus on Data Science” (VRM: 2020 10-K, 2021-3-3). Yes, my friends at Vroom HQ, it was obvious you had leaned on your robot. It just wasn’t obvious to Bloomberg and the rest of the market.
Bloomberg should have caught this bonkers price activity in all its hot pink glory before distributing that report. It’s their chart, after all. They do run the largest financial analysis and financial data company *checks notes* on Earth.
At the time of this writing, Vroom is down -98.60% since my homie and I looked at it that fine afternoon in 2021.
We never did get a chance to short it.
That makes us just as dumb, mindless and shambling as the guys who made that chart above.
Doesn’t it.10
A complete market abhorration, if you’re interested in learning more see: Investorpedia article on SPACs.
SEC vs. Akazoo. Link to document.
“Nikola founder Trevor Milton sentenced to four years in prison for fraud”. December 18, 2023. CNBC. Link to article.
Consent is Tea - the best video on the Internet for learning consent.
What we call the “long” side. The opposite of activist short sellers. Activist short sellers prefer Bud Light, sweatpants and financial literacy. Many of whom also may have been “dropped on their heads as babies”, per legendary short seller Jim Chanos. Do with that as you may.
BBB Warnings for Vroom - https://www.bbb.org/us/tx/stafford/profile/used-car-dealers/vroom-0915-90044633
Vroom values their inventory and discusses it in their filings, but we often will ballpark in our own numbers as shown above so that we can bullshit check their filings. Every analyst has their own way of creating estimates, fact-checking and bullshit testing. Here’s the inventory value in their 10-K: VRM: 2020 10-K, 2021-3-3
Technically, we’re dumber because those guys made money on the trade. We didn’t. Who is the smooth-faced shaved apes now? :o)