Shares of online used car retailer Carvana (NYSE:CVNA) have soared in 2020 on the idea that the novel coronavirus pandemic has permanently accelerated e-commerce disruption across the globe, particularly in verticals with previously small online retail penetration rates, like automobile sales. Carvana stock is stock up 32% year-to-date.
In the big picture, this is just the beginning of a much bigger, much longer rally in CVNA.
Carvana is pioneering disruptive change across the automobile market, attempting to fundamentally change the way we buy and sell cars. Because Carvana’s online convenience-first solution is miles better than the status quo solution, it truly is only a matter of time before the Carvana model becomes ubiquitous.
That’s not to say Carvana will be the only place we buy and sell cars in the future. Rather, it is to say the future of buying and selling cars is online, and that Carvana will be a major used car retailer in that online-dominated world.
As Carvana pioneers this disruption across the country over the next several years, the company’s sales will continue to soar. Margins will improve with scale. Today’s net losses will turn into huge profits. And CVNA stock will keep soaring — by more than 100%.
Here’s a deeper look.
The Future of Car Buying
Make no mistake about it. The future of car buying is online.
Across the entire auto industry today, less than 10% of sales happen online. That number is going to head way higher over the next decade for a few reasons.
First, the brick-and-mortar car buying process sucks. It takes forever. It requires a lot of back-and-forth. And it’s fragmented, without a streamlined solution, and with many moving, disjointed parts. No wonder more than 80% of consumers do not enjoy the current car buying process.
Second, pivoting towards an online sales model fixes most of these friction points. It’s quick. It’s convenient. And it’s a centralized, end-to-end, streamlined process that makes car buying much, much easier and more familiar (it’s just like shopping on Amazon (NASDAQ:AMZN), which we all do). Again, no wonder 75% of consumers are open to purchasing a car online.
Third, technological and infrastructure advancements are addressing what were formerly shortcomings of the online model. For example, optimized logistics can now deliver a vehicle bought online nearly as quickly as Amazon delivers packages, while data-driven analysis gives consumers an objective, complete and transparent overview of potential vehicles, without needing to see them.
Fourth, consumers are simply ready for this change. Across all major verticals, e-retail sales penetration rates are rising. Quickly. And this is a rising tide that will lift all boats, auto sales included.
Net net, e-retail sales in the automobile category are on the verge of breakneck, disruptive growth over the next decade. And Carvana is at the epicenter of this megatrend.
Carvana Stock to $300?
By my numbers, Carvana stock has a realistic upside to $300 over the next several years.
The idea is simple. Carvana is presently the leader when it comes to pioneering the online retail sales model in the U.S. used car market. That market is very big (40+ million used cars sold every year). Carvana is still very small (less than 200,000 cars sold last year). But the company is growing very quickly (unit sales up ~8,500% since 2014).
Sure, over the next several years as the online automobile retail model gains traction, more players will enter the market. But Carvana should be able to leverage its strong brand equity and awareness, as well as its wide distribution network (which includes the innovative car vending machines) and its huge used car inventory, to sustain a leadership position in the market.
In numbers, that idea translates to a $300 price tag for CVNA stock by the end of the decade.
Carvana has attained ~0.4% market share in the U.S. used car market. In Atlanta, its most established market, the company is at 2%+ market share. At its current rate of share expansion (20 to 30 basis points per year), Carvana should attain 2%+ national market share by 2025, and near 4% market share by 2030.
Average sales prices should rise slightly with increased demand and inflation. Huge unit growth plus slight unit revenue growth lays the groundwork for near 1,000%+ sales growth to somewhere around $40 billion in sales by 2030. Assuming the company hits management’s long-term profit margin targets, then on that huge sales base, earnings per share could come out around $15.
Based on a 20-times forward earnings multiple — which is historically average for consumer discretionary stocks — that implies a 2029 price target for CVNA stock of $300.
Bottom Line on CVNA Stock
Carvana is a long-term winner, powered by robust e-commerce adoption tailwinds in the under-penetrated online automobile retail market.
Indeed, for all intents and purposes, one could say that Carvana is turning into the Amazon of used cars — and as the Amazon of used cars, Carvana (and CVNA stock) have a long ways to go before their maxed out.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN.