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Carvana Idea Proposal (CVNA)

Carvana Idea Proposal (CVNA)
 

Can Carvana sustain its growth and profitability trends or will these be curtailed by intense competition?

Report Available: February 18, 2021

 

Blueshift’s ongoing research found the online car buying trend and the preference for used cars gaining significant strength as a direct result of the COVID-19 pandemic.  Demand and pricing for used cars has skyrocketed since the pandemic has people avoiding public transportation and ride-sharing apps. CVNA, the leading online and only vending machine used car dealer, has benefited with incredible results in Q3 and predicts strong growth in 2021. However, the used car market remains highly fragmented and competition from both traditional dealers embracing e-retailing and pureplay ecommerce dealers is fierce. Some on the Street suggest that CVNA is due for a significant pull back as a result.

 

Observations

  1. The used car market looks favorable for CVNA with record high prices and strong demand. Cox Automotive senior economist Charlie Chesbrough said, “Rising prices are likely to continue in the used-vehicle market, though demand may be undeterred. Additional stimulus dollars coupled with limited alternative transportation options is likely to keep interest in used vehicles, and the ability to purchase, elevated throughout 2021.”
  2. CVNA’s Q3 results easily beat Wall Street’s expectations as revenue was up 41%YY at $1.54 billion, $10 million more than analysts’ projections. EPS surprised with a loss of only $0.10 per share vs. the Street’s expectations for a loss of $0.30 per share. CVNA sold 64,414 cars in Q3, a 39% YY increase. Gross profit per unit increased to $4,056, an impressive jump of $1,100. The company also opened its ninth inspection and reconditioning center (IRC) and 25th vending machine and now reaches 72% of the U.S. population. CVNA did not issue Q4 guidance citing economic uncertainty because of the COVID-19 pandemic.
  3. Despite the strong Q3 performance and the expectation that market conditions will continue with high demand for used cars, some analysts have expressed concern regarding CVNA’s likelihood of extending its incredible growth streak or attaining profitability. In an article titled Carvana: A Bubble Waiting To Burst, Gary Alexander points out that CNVA is close to hitting a saturation point now that it services more than three-quarters of the U.S. population and there is reputable competition from companies like VRM and SFT.
  4. Garrett Nelson with CFRA Research questioned in December if CVNA will ever become profitable. He noted, “Despite pandemic trends which couldn’t be much more favorable to CVNA, it still could not generate a profit. We maintain a Strong Sell, pointing out that Q3 gross margin was within its long-term target range of 15%-19% and think it is fair to ask how much better things get from here. In the meantime, competitors have greatly accelerated their e-commerce capabilities.” However, on January 6, Nelson and CFRA changed their recommendation to Hold, citing “…CVNA’s pros and cons are now more balanced and it enters 2021 in a better position than it was a year ago. The company is also seen as a potential beneficiary of additional stimulus and vaccine rollout issues.”
  5. Blueshift’s 4, 2019, report found that profits would be attainable for CVNA if it continued to adjust and execute its business plan and operations. Nine of 14 sources said CVNA can become profitable with adjustments to its business plan, some of which the company is already undertaking. Sources said lowering the cost of acquiring cars, adding more IRCs, and providing parts and service options for buyers will help CVNA reach profitability. Blueshift’s July 30, 2020, KMX report found CVNA and VRM online pure plays as the main competition for KMX’s omnichannel program. Sources said they have strong marketing and have captured a younger demographic that has accepted online buying. Some think, however, that CVNA’s offering is limited and attaining profitability will be a challenge.

 

Is CVNA positioned to sustain its strong Q3 2020 growth and profitability trends? What factors could curtail CVNA’s continued success? Are online competitors gaining share and effectively competing in CVNA’s domain? Are traditional car dealers that have added ecommerce gaining in the online space? Which companies are challenging CVNA most? Is KMX’s omnichannel offering considered a significant competitor to CVNA? Is CVNA’s lack of a high-margin parts and service operation a significant issue? Will CVNA ever be profitable? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Used car dealers, Banks and lenders, Online competitors, and Industry specialists. 

 

Companies: AutoNation (AN), CarGurus Inc. (CARG), CarLotz (LOTZ), CarMax Inc. (KMX), Carvana (CVNA), Lithia Motors Inc. (LAD), Shift Technologies (SFT), Sonic Automotive, Inc. (SAH), TrueCar Inc. (TRUE), Vroom Inc. (VRM)

 

Research Begins: February 1, 2021

 

To see other ideas Blueshift Research is currently working on, please click here.

 

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