CVNA - Carvana is Leveraging Technology to Take Advantage of Large Fragmented Used Car Market

Summary Used car market is primed for digital disruption and Carvana has been leading the way over the last few years as indicated by their stock price. They are focused on growth and there is huge potential in the massive fragmented used car market This is a growth play, might be a bit risky due to their current financial position but if they can execute successfully, and they seem to be, Carvana could dominate the used car pace I would recommend taking a quick look at their investor presentation: They outline the market opportunity, growth, and strategic direction very clearly. I did not want to include the images in this post so the link is provided below https://investors.carvana.com/~/media/Files/C/Carvana-IR/documents/events/intro-to-carvana-october2020-final.pdf Company Overview Here is the summary of how Carvana operates – the key takeaway points are highlighted. Founded in 2012 and based in Phoenix, Carvana’s (NYSE: CVNA) mission is to change the way people buy cars. By removing the traditional dealership infrastructure and replacing it with technology and exceptional customer service, Carvana offers consumers an intuitive and convenient online car buying and financing platform. Carvana.com enables consumers to quickly and easily shop more than 20,000 vehicles, finance, trade-in or sell their current vehicle to Carvana, sign contracts, and schedule as-soon-as-next-day delivery or pickup at one of Carvana’s patented, automated Car Vending Machines.  June 6, 2019 – McKinsey Report Used cars, new platforms: Accelerating sales in a digitally disrupted market  I realize this is report is a bit dated, but I believe the underlying information and trends still hold true. “As revealed by our proprietary customer research, online providers are beginning to dilute traditional used-car dealers’ positions and drive growth by empowering digitally savvy customers via three major capabilities:” complete end-to-end purchasing capabilities (desired by 59 percent of buyers) extensive vehicle data and photos, along with effective search tools (desired by 64 percent of buyers) unique delivery options (desired by 28 percent of online buyers) “We estimate that the number of used vehicles three years old or less will increase from 51 percent of the total in 2017 to about 60 percent in 2022” Carvana is addressing these 3 key capabilities customers are looking for. https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/used-cars-new-platforms-accelerating-sales-in-a-digitally-disrupted-market      Feb 25, 2021 Recent Results Summary from their 2020 Year End Earning Report. The growth results are significant in terms of units sold and revenue Retail Units Sold of 244,111, an increase of 37% YoY Revenue of $5.587 Billion, an increase of 42% YoY Total Gross Profit of $793.8 Million, an increase of 57% YoY Vehicles Purchased Directly from Customers up 95% YoY https://investors.carvana.com/news-releases/2021/02-25-2021-210520761    Financial Metrics CVNA Industry Price/Book (MRQ) 55.92 7.83 Net Profit Margin (TTM) -3.06% 1.75% Return on Equity (TTM) -19.95% 8.85% Debt to Equity (MRQ) 2.02 40.65 The Price to Book does not paint Carvana in a great light. For example, Amazon’s PB ratio is about 16. This does not consider future earning for Carvana, which is the main play here. Carvana has a low D/E ratio compared to the industry Institutional Ownership There are some big-name institutions that are holding significant shares of Carvana. Breakdown in the table below and is pulled from Yahoo Finance. Holder Shares % Out Value Price (T.Rowe) Associates Inc 8,607,674 10.99% 2,061,882,229 FMR, LLC 6,987,935 8.92% 1,673,889,949 Morgan Stanley 6,700,363 8.55% 1,605,004,953 Tiger Global Management, LLC 6,012,907 7.68% 1,440,331,742 Vanguard Group, Inc. (The) 5,897,408 7.53% 1,412,665,112 Baillie Gifford and Company 5,806,161 7.41% 1,390,807,805 Spruce House Investment Management LLC 3,963,463 5.06% 949,407,927 Blackrock Inc. 3,432,778 4.38% 822,287,642 D1 Capital Partners, LP 3,364,985 4.30% 806,048,506 CAS Investment Partners, LLC 3,205,028 4.09% 767,732,407 Management Team A solid group with mixed backgrounds from both the automotive industry and technology industry. Refer to the their recent investor presentation Potential Risks Debt to Equity: CVNA's debt to equity ratio 153% is considered high. You could argue that this is due to focus on growth Cash Runway: CVNA has less than a year of cash runway if free cash flow continues to reduce at 36% each year. They recently became profitable so they can improve their cash runway. Again, focused on growth so cash that they do have is likely being used to invest in growth Final Thoughts The underlying financials indicate a company focused on growth, then profitability. Because their strategy is to capture significant market share of a fragmented market we will likely see the payoff in the next year or 2.

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GeorgeL88

Mar 10, 2021
· POSITION CLOSED

3.34%

Position Return %

266.19

Price When Posted

8.90

Position Return

CVNA

Carvana Co. - Class A

309.05

-10.07
-3.16%
Current Price

CVNA - Carvana is Leveraging Technology to Take Advantage of Large Fragmented Used Car Market

bullish

Summary

  • Used car market is primed for digital disruption and Carvana has been leading the way over the last few years as indicated by their stock price.
  • They are focused on growth and there is huge potential in the massive fragmented used car market
  • This is a growth play, might be a bit risky due to their current financial position but if they can execute successfully, and they seem to be, Carvana could dominate the used car pace

I would recommend taking a quick look at their investor presentation: They outline the market opportunity, growth, and strategic direction very clearly. I did not want to include the images in this post so the link is provided below

https://investors.carvana.com/~/media/Files/C/Carvana-IR/documents/events/intro-to-carvana-october2020-final.pdf

 

Company Overview

Here is the summary of how Carvana operates – the key takeaway points are highlighted.

Founded in 2012 and based in Phoenix, Carvana’s (NYSE: CVNA) mission is to change the way people buy cars. By removing the traditional dealership infrastructure and replacing it with technology and exceptional customer service, Carvana offers consumers an intuitive and convenient online car buying and financing platform. Carvana.com enables consumers to quickly and easily shop more than 20,000 vehicles, finance, trade-in or sell their current vehicle to Carvana, sign contracts, and schedule as-soon-as-next-day delivery or pickup at one of Carvana’s patented, automated Car Vending Machines.

 June 6, 2019 – McKinsey Report Used cars, new platforms: Accelerating sales in a digitally disrupted market

 I realize this is report is a bit dated, but I believe the underlying information and trends still hold true.

“As revealed by our proprietary customer research, online providers are beginning to dilute traditional used-car dealers’ positions and drive growth by empowering digitally savvy customers via three major capabilities:”

  1. complete end-to-end purchasing capabilities (desired by 59 percent of buyers)
  2. extensive vehicle data and photos, along with effective search tools (desired by 64 percent of buyers)
  3. unique delivery options (desired by 28 percent of online buyers)

“We estimate that the number of used vehicles three years old or less will increase from 51 percent of the total in 2017 to about 60 percent in 2022”

Carvana is addressing these 3 key capabilities customers are looking for.

https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/used-cars-new-platforms-accelerating-sales-in-a-digitally-disrupted-market

 

  

Feb 25, 2021 Recent Results

Summary from their 2020 Year End Earning Report. The growth results are significant in terms of units sold and revenue

  • Retail Units Sold of 244,111, an increase of 37% YoY
  • Revenue of $5.587 Billion, an increase of 42% YoY
  • Total Gross Profit of $793.8 Million, an increase of 57% YoY
  • Vehicles Purchased Directly from Customers up 95% YoY

https://investors.carvana.com/news-releases/2021/02-25-2021-210520761

 

 Financial Metrics

 

CVNA

Industry

Price/Book (MRQ)

55.92

7.83

Net Profit Margin (TTM)

-3.06%

1.75%

Return on Equity (TTM)

-19.95%

8.85%

Debt to Equity (MRQ)

2.02

40.65

The Price to Book does not paint Carvana in a great light. For example, Amazon’s PB ratio is about 16. This does not consider future earning for Carvana, which is the main play here. Carvana has a low D/E ratio compared to the industry

 

Institutional Ownership

There are some big-name institutions that are holding significant shares of Carvana. Breakdown in the table below and is pulled from Yahoo Finance.

 

Holder

Shares

% Out

Value

Price (T.Rowe) Associates Inc

8,607,674

10.99%

2,061,882,229

FMR, LLC

6,987,935

8.92%

1,673,889,949

Morgan Stanley

6,700,363

8.55%

1,605,004,953

Tiger Global Management, LLC

6,012,907

7.68%

1,440,331,742

Vanguard Group, Inc. (The)

5,897,408

7.53%

1,412,665,112

Baillie Gifford and Company

5,806,161

7.41%

1,390,807,805

Spruce House Investment Management LLC

3,963,463

5.06%

949,407,927

Blackrock Inc.

3,432,778

4.38%

822,287,642

D1 Capital Partners, LP

3,364,985

4.30%

806,048,506

CAS Investment Partners, LLC

3,205,028

4.09%

767,732,407

Management Team
A solid group with mixed backgrounds from both the automotive industry and technology industry. Refer to the their recent investor presentation

 

Potential Risks

  • Debt to Equity: CVNA's debt to equity ratio 153% is considered high. You could argue that this is due to focus on growth
  • Cash Runway: CVNA has less than a year of cash runway if free cash flow continues to reduce at 36% each year. They recently became profitable so they can improve their cash runway. Again, focused on growth so cash that they do have is likely being used to invest in growth

 

Final Thoughts

The underlying financials indicate a company focused on growth, then profitability. Because their strategy is to capture significant market share of a fragmented market we will likely see the payoff in the next year or 2.


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295.20

Target Price

8/ 10

Confidence

2-6 Months

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