It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change. – Charles Darwin

As consumers shift more shopping online, Carvana Co. (CVNA) is transforming the used car market. CVNA allows shoppers to quickly sell a car online by entering your car’s VIN and answering a few questions before receiving a real offer in only minutes. Or customers can buy online, picking up cars from a CVNA vending machine or by having it delivered. Either way, CVNA’s goal is to provide a superior customer experience by being seamless and straightforward.

CVNA seeks to disrupt the large and fragmented used car market as the company cites a statistic that 81 percent of consumers do not enjoy the car-buying process. With a superior experience offered, CVNA is rapidly expanding into markets, with 261 markets at the end of Q3 2020, up 79 percent from year-end 2019. Cars sold is also growing, with over 170,000 units sold in the first three quarters of 2020 already matching the volume sold in the last full year.

Source: Company materials

Financial results

With the expansion in volumes, CVNA notched growth in revenues and gross profit per unit. In the third quarter of 2020, revenues rose 41 percent year-over-year to $1.5 billion. Gross profit per unit continues to climb, as shown below, and is 42 percent higher than where it ended the previous year as the company continues to build economies of scale. A reduction in average days to sale, increases in retail cars sourced and wholesale cars sold also contributed to higher gross profit per unit.

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Source: Company materials

As CVNA continues to grow scale and efficiencies, further improvements in profitability will follow. For example, advertising expense per unit sold is lower for the 2019 cohorts than any previously opened cohorts. The net loss for the third quarter of 2020 of $18 million shrunk from a loss of $92 million in the third quarter of 2019.

Solid capital position

CVNA has taken advantage of the capital markets this year to further expand its solid capital base, issuing over $1 billion in common stock. The company also issued $1.1 billion in senior notes in October 2020. Part of the proceeds will be used to redeem existing senior notes paying a higher rate due in 2023. These capital markets transactions demonstrate the depth to which CVNA can access capital as it continues to grow.

Stock performance

Year-to-date, CVNA has more than doubled, from $92 to $210. A large portion of the price rise came in August when CVNA reported second quarter results. Since then, the stock has been somewhat range-bound, though I believe fundamentals continue to strengthen, and third quarter results demonstrate even further success in building out the business model.

Risks to ownership

  • Weak economic conditions can negatively impact demand. Periods of unemployment or underemployment can hamper consumer’s abilities to transact with CVNA. However, personal transportation remains a priority over mass transit options in the near future.
  • CVNA needs to continuously source supply and build inventory, which can be challenging when the demand for used cars rises.

Summary

Having made good progress on adding capacity, CVNA has guided to strong growth in 2021 without giving specific numbers. While the model benefited from the pandemic, I believe CVNA is fundamentally transforming the car-buying experience and has significant room to expand within the used car market.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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