Carvana (CVNA) is set to make its IPO debut today. The deal priced at $15, at the mid-point of its expected range of $14-16. Carvana offers an eCommerce platform for buying used cars. We think of it as sort of a cross between Amazon (AMZN) and CarMax (KMX). On the Carvana platform, consumers can research and identify a vehicle, inspect it using a proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices.
Carvana says its purpose is to provide a no pressure, no haggle experience when buying a used car. First thing to note is that Carvana does not have car lots and customers do not see the car in person. Customers access Carvana's mobile app or website to browse through its nationally pooled inventory of over 7,300 high-quality used vehicles. All of its cars have no reported accidents, and must pass a 150-point certification process before it is Carvana ready.
After purchase, Carvana then drives the car to the customer or you can pick it up at a Carvana Vending Machine in Atlanta, Nashville, Houston, Austin or San Antonio. Just enter your confirmation code on a keypad, the Vending Machine will open, and you get to drive away with your new car. Carvana staff will be on-site to assist if needed.
Another option for pick-up is Fly and Drive. Even if you are located outside of Carvana's extended service area, you can still buy a car from Carvana and pick it up at one of its Vending Machines. Book a one-way flight to Atlanta, Nashville, Houston, Austin or San Antonio, and Carvana will subsidize $200 of your airfare. Instead of a test drive, you get seven days to return the vehicle if it's not the right match for you.
By not operating car lots, Carvana benefits from a lower cost structure relative to traditional dealerships. Carvana does not require a network of brick-and-mortar dealerships staffed with sales personnel; instead, it uses both an in-house logistics network and proprietary vending machines to facilitate trade-ins and vehicle delivery. As a result, Carvana says its sales prices averaged $1,430 below Kelley Blue Book Suggested Retail Value during 2016.
In terms of the financials, Carvana has never been profitable since its inception in 2012. And it sounds like profits could be a ways off as the company expects to make significant investments to further expand its business. If you're buying Carvana as in investment, it's not profit or cash flow you're buying, it's a bet on whether this new method/paradigm for used car shopping can be a viable business.
With that said, Carvana is seeing some very strong initial revenue growth. Revenue has basically tripled each of the past two years. In 2016, revenue came in at $365.1 mln, up 180% from 2015. Retail units sold in 2016 nearly tripled to 18,761. Also, while CVNA is far from profits, its gross profit per unit sold is showing some good progress: from a $(201) loss in 2014 to a $1,023 profit in 2016.
In sum, as we said, Carvana strikes us as a combination of Amazon and CarMax. It's like Amazon because it's all online and the car gets delivered to you. Also, like Amazon, Carvana saves a lot of money by not having vehicle showrooms which carry a lot of costs (rent, salespeople salaries, electricity, insurance, heat etc.) This allows them to price their cars on average $1,430 below Kelley Blue Book Suggested Retail Value. It's similar to CarMax because it's also a no-haggle pricing format and, like CarMax, you can choose from thousands of cars nationwide and have it shipped. You are not limited to just the few hundred on a traditional dealership lot. This is a new paradigm for buying used cars, time will tell if it works out.