Carvana (CVNA), which made its IPO debut in late April, is trading sharply lower today after reporting Q3 results last night. Since you're probably not familiar with Carvana, a little background would help. It offers an eCommerce platform for buying used cars.
We think of it as sort of a cross between Amazon (AMZN) and CarMax (KMX). It's like Amazon because it's all online (no car lots) 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.
Carvana is attempting to disrupt an industry that you would not think would make sense to go all online, but it may work. It's working in the mattress world with online-only suppliers like Tuft & Needle, Casper, Saatva taking considerable market share from 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 the online companies are doing very well 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, test driving it etc.? We shall see.
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.
Turning to the Q3 results, Carvana reported a non-GAAP loss of $(0.29) per share, which was slightly better than market expectations. Revenue rose 128% year/year to $225.4 mln, which was at the low end of prior guidance of $225-255 mln. Retail units sold increased 133% YoY to 11,719. In terms of guidance for Q4, CVNA expects revenue of $257-287 mln and retail units of 13,600-15,000 (+143-168% YoY).
In sum, this was a difficult quarter for CVNA with revenue coming in on the lighter side. On the positive side, CVNA says it achieved several significant milestones during Q3, as it launched a record nine markets and opened its first West Coast inspection and reconditioning center in Phoenix, bringing the Carvana experience coast to coast. The stock has been struggling in recent months. It will take time to see if Carvana's model is going to be successful.