Carvana Investment Thesis

Carvana Co (NYSE:CVNA) disrupted the traditional used car marketplace with its innovative car vending machines and curbside delivery/pickup. This changed the typical dynamic by removing the used car salesman from the process.

Sales pressure is one of the biggest pain points in the car-buying process, and this is the basis of the Carvana investment thesis.

CVNA not alone in the market – several used car dealerships have large distribution footprints or are working on similar online sales techniques. This could be the new way to sell a car, and it will attract more competition as it catches on.

It’s time to dive into the nuts and bolts of what analysts believe makes Carvana a solid long-term investment.

Carvana Market Share

Carvana debuted on Automotive News’ top 100 retailers list at number 8 in 2019 based on a sales volume of 94,108 vehicles for 2018. This was a full two years after going public in April 2017, and the company shows a healthy track record of growing its sales.

This only accounts for 0.4 percent of the overall U.S. vehicle market and shows how much room the company still has to grow.

In fact, it grew its market share while the market itself shrank in 2020. The current U.S. used car market size is estimated at $88 billion in 2021, and Carvana is growing. It sold a total of 244,111 vehicles in 2020, a 37 percent year-over-year increase from the prior 12-month period.

This should place it in the top three for the 2020 report. And it’s still only selling in 24 states. Once the company expands to cover all 50 states (or at least the 48 contiguous ones), it is estimated to be the clear market leader in a very crowded market.

That leaves analysts wondering if the car retailer has a moat to protect its business.

Does Carvana Stock Have A Moat?

The biggest competitive advantage Carvana has is its unique sales and distribution model. Although companies like AutoNation and CarMax (KMX) have large retail footprints, they still rely on human staff with high-pressure sales techniques to unload them.

Carvana’s value is unique – you can buy or sell your car with all information known up front. There are no hidden costs, and you can shop from the comfort of your own home.

And the company’s giant car vending machines are highly visible, acting as their own form of advertisement. Some people will buy a car using the service just for the experience of buying at a fully automated machine.

But online isn’t its only sales outlet. The company smartly moved into online retail and lets people buy and sell their vehicles from home. Curbside pickup extends its reach far beyond the major hubs where it’s building the vending machines.

This is the secret sauce that keeps Carvana growing while the industry as a whole struggles to keep up. And the revenues are growing too.

Is Carvana Growing Revenues?

As Carvana continues expanding, its revenues are growing with it. The company generated $5.587 billion in 2020, which is a 42-percent increase from the prior year. From that, it grossed $793.8 million, which is a 57-percent increase.

The company also increased the volume of vehicles it purchased from customers, which gives it a rotating inventory of used vehicles that only helps it further grow.

By building an efficient distribution system, Carvana can horizontally expand to cover more territories and further grow its potential revenue. The only real questions left are how big it can get before hitting a growth ceiling and how long it’ll take to get there.

And that means we need to examine its growth rate.

What Rate Are Carvana Earnings Growing?

Carvana’s earnings of $793.8 million represents a 57 percent increase from the prior year. In addition, growing gross profits in the fourth quarter of $243.9 million represents a 71 percent increase from the same quarter in 2019.

In addition, 2019’s gross profit of $506.4 million is a 157-percent year-over-year increase. This alludes to a potential slowing of growth as the company continues to scale. The bottom line however continues to be negative.

However, the slowdown can also be attributed to the overall shrinkage of the market during the pandemic. We won’t know for sure what’s happening until another year or two down the line, but its growth rate is outpacing its peers and industry leaders.

This growth is often attributed to solid leadership, so it’s important to understand more about the c-suite at Carvana.

Carvana Management Quality

Carvana is led by co-founder, President, Chairman, and Chief Executive Officer Ernie Garcia, III. He held various high-level executive roles in DriveTime to learn the business. This includes financial strategist, managing director of corporate finance, and Vice President, Treasurer, and Director of Quantitative Analytics.

Because of his deep involvement in the vehicle industry, he understands and addressed the main pain points customers have. In doing this, he created a disruptive company that’s changing the way we buy and sell vehicles.

The company has a 5-star review on Comparably, but only 3 and a half stars on Glassdoor. Of those reviews, 81 percent approve of the CEO. The most common complaint is that the company is so busy and people are working longer hours.

However, for investors this is a double-edged sword, as it reinforces the notion that the company is growing at a fast pace. So long as it can maintain staffing and customer satisfaction levels as it scales, the company is well positioned to become the dominant player in its industry.

Still, there are headwinds coming.

Carvana Must Change Consumer Buying Habits

The biggest problem slowing Carvana down is the change in car buying habits brought by the pandemic. People are holding vehicles for longer, as they’re driving less and have less money to spend. This creates a dynamic that ultimately shrank the used vehicle market.

And that means Carvana is growing while competitors are shrinking. This could create stronger competition. In fact, some companies are already copying its direct-to-your-door vehicle delivery model.

Because it has already proven the concept, it’s drawing a flood of rivals seeking to replicate its success. It needs to continue pushing with all hands on deck to remain on its trajectory. And we already see that pace slowing.

It could quickly find itself holding a large volume of inventory with nobody buying if it’s not careful. This balancing act will be crucial in continuing to satisfy investors’ need for constantly improving bottom lines.

If it can continue pushing the gas through that, it could have a great decade.

Carvana Investment Thesis Conclusion

Carvana is a Tempe, Arizona-based car dealer that’s changing the way we buy and sell cars. It cuts out the high-pressure salesforce to give buyers and sellers a direct link to an automated service doing all the work in the background. This relieves a major industry pain point.

Because of this, the company had a strong growth trajectory leading into the 2020s that it’s continuing in the face of a shrinking industry.

Of course, that growth is slowing with a diminishing market. The pandemic lessened the need for cars, and fewer people are buying fewer of them. If the company can continue expanding in this tight market, it will be the industry leader in no time. It just remains to be seen how long it can stay in the lead before peers start eroding its market share.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.