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Carvana Idea Proposal (CVNA)

Carvana Idea Proposal (CVNA)
 

Does Carvana truly have a unique business model that will eventually become profitable?

Report Available: December 4, 2019

 

Blueshift’s initial research found CVNA, the technology-driven online used car dealer using car vending machines, posting amazing growth numbers and attempting to disrupt how used cars are bought and sold. Founded in 2012 to modernize and streamline the used-car buying experience, CVNA has become the third largest retailer of used cars in the U.S. With an online focus, no-sales salespeople, no haggling, access to a massive inventory, financing, and extended service contracts, CVNA has built a car buying experience customers love. However, CVNA has yet to produce a profit and it has been moving further away from profitability in its pursuit of growth. This lack of profit has led some in the auto and finance industries to question if CVNA’s business model is truly unique or just a gimmick that will have to fight for profits like every other used car dealer.

 

Observations

  1. CVNA’s Q3 performance exceeded $1 billion in revenue for the first time and achieved the 23rd straight quarter of triple-digit growth. Revenue rose 105% year to year and retail unit transactions were up 83% to 46,000 in the quarter. Despite these impressive top-line growth numbers, operating loses persist. In Q3 2018, CVNA’s net income was a loss of $64.4 million. This year, Q3 losses totaled $92.2 million – a 43.2% difference. These losses are due to the massive growth in overhead in order to feed CVNA’s top-line acceleration.
  2. CVNA’s Q3 expansion and additional overhead includes a 249% increase in auto purchases from customers (a positive as this increases gross margin on sales), the start of construction on its eighth inspection and reconditioning center (IRC), four new car vending machines, bringing its total to 22 across the U.S., and the opening of nine new markets during the quarter, widening CVNA’s reach to 146 markets at quarter’s end.
  3. The financial community is beginning to ask when or if CVNA will turn a profit. One questioner said that delivering a better customer buying experience does not always translate into a successful business. This source cited Beepi as an example of a company set on revolutionizing car sales using an online model that went out of business. Another source said that although CVNA’s sky-high growth rates are dazzling, it is only making minimal profit gains. This leads some to wonder whether CVNA is nothing more than slick internet marketing and a car vending machine wrapped around an old business model.
  4. CVNA’s CEO was recently interviewed and specifically addressed the profitability worries saying, “over the last three years we’ve gone from losing about 23 cents on every dollar of revenue to 3 cents last quarter.” He further suggested with the incredibly large growth opportunity still facing the company, “I think it’s hard to say that now is the time to take your foot off the gas.”
  5. CVNA was referenced in two of Blueshift’s recent KMX reports. In our August 21 report, CVNA was KMX’s most frequently discussed competitor. Comments included that CVNA provides strong competition, there is room for both CVNA and KMX, KMX can do it cheaper-better-faster than anyone, and CVNA’s business model is not sustainable. In our May 1 report, CVNA was the most frequently discussed competitor disrupting used car sales with its online selling model, its car vending machines, and delivery service. Sources were impressed with CVNA but raised concerns that it is not making any money.

 

Is CVNA’s business model unique? Does CVNA provide a better customer experience? Can the CVNA business model reach the company’s goal of selling 2 million cars per year? Will the CVNA business model turn a profit? If yes, when?  What headwinds and roadblocks could prevent CVNA from achieving profitability? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: New and used car dealers, Banks and auto finance companies, CVNA’s online competitors, and Industry specialists.  

 

 

Companies: AutoNation Inc. (AN), Asbury Automotive Group Inc. (ABG), Berkshire Hathaway Inc.’s (BRK.A/B) Berkshire Hathaway Automotive, CarMax Inc. (KMX), Carvana Co. (CVNA), Lithia Motors Inc. (LAD), Penske Automotive Group Inc. (PAG), Sonic Automotive Inc. (SAH)

 

Research Begins: November 11, 2019

 

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

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