Carvana (CVNA 50.82, +4.65, +10.07%) is trading sharply higher today after
reporting Q3 results last night. With the stock up nicely from its IPO price of
$15 in April 2017, investors are starting to believe Carvana's business model
Carvana essentially offers an eCommerce platform for buying used cars, something like a cross between Amazon (AMZN) and CarMax (KMX). Like Amazon, its selling operations are based online (no car lots); vehicles are delivered to their purchasers. Furthermore, Carvana, like Amazon, saves money by limiting its physical footprint; not having vehicle showrooms spares Carvana many of the costs affiliated with those spaces, such as charges for rent, electricity, heating, or insurance or salaries for lot salespersons. These savings allow Carvana to price its cars on average $1,430 below their Kelley Blue Book Suggested Retail Value.
Meanwhile, like CarMax, Carvana 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 the effort may be productive. 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 brick-and-mortar mattress stores. You would think consumers would want to feel and test a mattress in person, but online companies are nevertheless performing successfully, disrupting that market. Carvana and others are adopting this model in the used car market, examining whether customers, supported by detailed vehicle listings on the company’s platform and post-pick-up return policies, are willing to purchase used cars prior to test drives.
Cars purchased through Carvana can be delivered via having Carvana drive the car to you or via “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 Vending Machines. Book a one-way flight to a Vending Machine location -- Carvana will subsidize $200 of your airfare -- and then you can drive your new vehicle home the same day: hence, “Fly and Drive.”
Turning to the Q3 results, CVNA is not yet profitable, as it posted a Q3 non-GAAP loss of ($0.40), which was actually both worse than last year’s loss of ($0.29) and than market expectations. However, revenue jumped 137% year/year to $534.9 mln, a good bit above prior guidance of $480-520 mln. Retail units sold in Q3 totaled 25,324 (above prior guidance of 23-25K), an increase of 116% year/year. In terms of Q4 guidance, CVNA expects revenue of $570-630 mln and units sold of 27,500-30,000.
On the expansion front, CVNA launched 13 new markets in Q3, bringing its total markets to 78 at quarter end (and up to 82 as of today). Its Q3 markets growth continued to increase the Carvana network's density, as the company largely launched markets near its existing footprint. This increased the total percentage of the company’s U.S. population coverage to 55.8%, up from 52.8% at the end of Q2. CVNA also opened two vending machines in Cleveland and Philadelphia.
Judging by today’s trading reaction, investors are clearly happy with the Q3 results and forward-looking guidance. Even though the company missed slightly on EPS, investors are less concerned for now with profit than growth, and CVNA is doing well on that front. While the progress has been pretty good thus far, it will take time to see if Carvana's model is going to be successful over the long term. We have had our doubts about this business model, but as CVNA grows in scale, the outlook is getting brighter.
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