Carvana Is Rapidly Disrupting the Auto Industry — Don’t Miss Your Ride

Carvana (NYSE:CVNA) is on a mission to change the way people buy cars. They’re harnessing the power of digitization and applying it to the massively fragmented auto industry. As such, I think an entry in Carvana stock at current valuations is attractive. Already, the numbers show that Carvana is well on its way to riding the long-term secular trend in online purchasing.

Source: Carvana

Online purchases are certainly more conducive for commodity-like items. Books, toys, certain electronic hardware are all relatively uniform and don’t require consumers to give things a test run. Cars, on the other hand, may seem less ripe for online disruption.

However, the digital economy is changing attitudes quickly. Data shows that almost all research on cars is already conducted online, that 75% of consumers would consider purchasing a car online and that 52% of car buyers test drive only one vehicle. So the barriers to Carvana’s business model are lower than one might initially think.

The Numbers Behind Carvana Stock

Carvana is executing on its mission. Retail units sold and gross profit per unit are the primary metrics I would look at to measure their growth and success. For the former, units sold have increased 113% year-over-year from 44,252 to 94,108. Compare this to just 2,105 units sold in 2014 and you’ll see there’s a trend tracking up and to the right.

What’s even more impressive is that quarter-over-quarter retail units sold has been increasing.  There are no down quarters that get evened out when figures are annualized. Carvana has been selling more units since the first quarter of 2014, indicating that they have tapped into an industry with rapid secular growth.

Carvana is selling lots of cars, but are they doing it with good margins? The answer to that is yes — and increasingly so. CVNA has been tinkering internally with their pricing algorithms, and it’s working. Gross profit per unit is also tracking similarly — from $1,539 in 2017 to over $2000 last year. This means that each incremental car sale is adding more to the profitability of the Company than cars sold in prior years. It’s no surprise then, that looking further down the P&L, overall EBITDA margin is tracking upward, and Carvana could see that hit positive territory in the next year or two.

Focusing on What Matters: User Experience

Carvana has over 14,000 cars to select from and provides users with over $1,000 in savings per vehicle compared to traditional car dealers. Only 8% of consumers rate traditional car salesman highly trustworthy and 81% of consumers do not enjoy the car buying process.

Carvana improves the user experience dramatically. Piles of paperwork that no one actually goes over with a fine-tooth comb are now streamlined into a ten-minute process from beginning to end. Next-day car deliveries are available in select markets for buyers who are antsy to drive their new vehicle.

A survey performed by Bazaarvoice as of December 2018 showed that 96% of users would recommend it to a friend.

CVNA’s Bets on Innovation Have Paid Off

CVNA’s Car vending machine is a sight to behold. It combines operational efficiencies (especially on the real estate side) with creative branding. Currently there are 15 vending machines operating nationwide.

In the Nashville market, Carvana saw market penetration double in two quarters after a vending machine launch. Betting on innovation is always a good decision.

The Bottom Line on Carvana Stock

Carvana is still in the early stages of a long-term secular trend. The user experience and business model have been validated over the last four years with revenues, margins, and unit sales up consistently. It’s an experience that appeals to younger buyers and has yet to show the full potential when at scale.

As the company continues to increase penetration and add new markets, Carvana stock will track the same way as its metrics — up and to the right.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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