Carvana (CVNA 44.52, -0.30, -0.67%), which made its IPO debut in April 2017, broke
out to new post-IPO highs this week. Though Carvana's business model has
historically attracted its fair share of criticism and doubts, at present, it
seems to be working out effectively.
Carvana offers an eCommerce platform for buying used cars. Think of it as sort of a cross between Amazon (AMZN) and CarMax (KMX). It's like Amazon because its operations are performed entirely online (no car lots); cars purchased get 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 also presents a no-haggle pricing format, and, like CarMax, Carvana allows customers to choose from among thousands of cars nationwide, which are subsequently shipped to the purchaser. Customers access Carvana's mobile app or website to browse through its nationally pooled inventory of 10,000+ quality used vehicles. With Carvana, buyers are not limited to just the few hundred options available on a traditional dealership lot. This is a new paradigm for buying used cars; time will test its longevity.
Carvana is attempting to disrupt an industry that few would expect to function well in an online-only avenue, but it may work. After all, similar approaches are working in the mattress world, with online-only suppliers like Tuft & Needle, Casper, and Saatva taking considerable market share from traditional brick-and-mortar mattress stores, which seem to pop up on every corner. You would think consumers would want to feel and test a mattress in person, but online companies are nevertheless seeing success and are disrupting that market. Carvana and others are adopting this model in the used car market. Would you buy a used car without touching it or test driving it? We shall see.
On the Carvana platform, prospective customers can get to know prospective purchases well, even absent direct physical encounters; 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.
Furthermore, every Carvana vehicle comes with a seven-day return policy. While Carvana does not have car lots and customers do not see the car in person pre-purchase, this return policy gives a customer the chance to actually test a car physically and to determine whether the vehicle is really compatible with his or her life. All Carvana vehicles are Carvana Certified, meaning they have passed a rigorous 150-point inspection, have never been in a reported accident, and have no frame damage. Features, imperfections, and updated information about open safety recalls are listed on every car's vehicle description page.
So how do you get your Carvana-purchased car? This is pretty
interesting as well. Delivery options include Carvana driving the car to you or an alternative known as “Fly and Drive.” If you are located outside of Carvana's extended service
area, a car you purchase from Carvana can be picked up at one of the company’s
signature Car Vending Machines. Book a one-way flight to a Vending Machine location,
and Carvana will subsidize $200 of your airfare, and then you can drive your
new vehicle home the same day: hence, “fly and drive.”
Let's talk a bit more about these vending machines. Upon arriving at the Car Vending Machine, customers receive a commemorative, oversized Carvana coin to activate the vending process and transport the car into the delivery bay. The pick-up process typically takes only minutes, compared to hours haggling at the dealership.
Just a few weeks ago, Carvana launched its largest Car Vending Machine to date, located in the company's hometown, Tempe, Arizona. Standing nine stories high, the vending tower, made entirely of glass, holds up to 34 vehicles and provides customers who have purchased vehicles on Carvana.com with the company’s trademark fun, unique pick-up experience. This is the company's 12th vending machine location. Tempe joins 11 other cities across the country that are home to Carvana Car Vending Machines: Houston, Austin, San Antonio, Dallas, Nashville, Raleigh, Charlotte, Jacksonville, Tampa, Orlando, and Washington D.C.
In sum, though Carvana has had some up and down quarters since its IPO, it seems to be firing on all cylinders now. It will take time to see if Carvana's model is going to be successful over the long term, but recent strong moves in the stock show that investors are currently buying more into the story.