Carvana’s stock soared ahead of the used car boom

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Used vehicle prices have risen 42% in one year, according to a new US inflation report. Some engines are running on latent gains. The Honda Odyssey, Kia Telluride and Dodge Challenger are among more than a dozen models that have recently scooped up more used than new, due to manufacturing shortages.

Used car dealers are thrilled. They buy cars and mark them for resale, which means they usually make money whether the prices are high or low. But when prices rise so rapidly, windfall profits are inevitable.

Take rapid growth

Carvana

(ticker: CVNA), which has a widely online template. Three years ago, its gross margin per vehicle was approximately $ 2,000. The long term goal is over $ 4,000. In the last quarter, the company exceeded $ 5,000.

“Trying to determine exactly how much of that $ 5,000 is attributable to this unique environment is not an easy thing to do,” said CEO Ernie Garcia III.

For now, the company is forecasting gross profit of over $ 4,000 per vehicle for the year, which suggests conditions will cool down from here on out. They could, slowly.

Auto production has been hampered by a shortage of semiconductors. The worst effects will occur this quarter and the chip shortage could ease by the end of next year,

Intelligence

CEO Pat Gelsinger recently told me.

Garcia says investors should watch Carvana’s long-term trend of increasing efficiency, which stems from structural benefits. Chief among these are its 50 to 100 acre Inspection and Reconditioning Centers, or IRCs.

There, nine-car trucks arrive from the highway, sometimes 10 to 15 at a time, to deliver the vehicles Carvana has purchased. Features and options are noted and diagnostics performed. Vehicles pass through a series of timed stations for routine work, or are put aside for more complex repairs. After a final refresh, the cameras take 360-degree photos for the sales listings.

At a typical dealership, a highly trained mechanic performs simple and complex work on cars before resale. Carvana, with its assembly line process, can hire workers for simple tasks and gradually train them for more skilled jobs. This keeps labor costs relatively low, Garcia says.

And while dealerships operate in prime retail locations, Carvana’s IRCs are located in remote areas, saving on real estate.

Carvana added its 13th IRC near Cleveland in the last quarter, and says its ability to return cars for resale has held back sales. It plans eight more centers by the end of next year, bringing its annual production capacity to 1.25 million vehicles.

In the last quarter, the company sold nearly 108,000 cars at retail, a 96% increase from last year. The percentage of cars it sources from its customers has increased, and these come with higher profit margins than cars from auctions.

Customers can get quotes on their cars online with their plate numbers. Carvana picks up trade and delivers customer purchases, or buyers can pick up their cars from one of its “vending machines”.

These are multi-story robotic glass installations that put on a show as they fetch cars, with an oversized coin that customers can place in a slot.

“It has generated fun and memorable experiences for our customers and is part of our brand,” Garcia said.

The shareholders appreciate the ride. Carvana went public in 2017 at $ 15 a share and initially traded below that price. It has skyrocketed since then, including roughly quadrupling its price just before the pandemic, to a recent $ 360.

Just over 60% of analysts who cover the stock say they buy it. Almost everyone else notes this in Hold, with many citing the rating as a concern. Carvana turned profitable on a net basis in the last quarter, but it is not expected to make a full year profit this year or next.

This year, Carvana is expected to more than double its revenue to $ 11.7 billion. That puts him in a distant second place – for now – for

CarMax

(KMX), which has more than 220 stores, and estimated revenue for its fiscal year ending in February at $ 25.9 billion. But beyond this year’s mad rush, Wall Street expects Carvana to continue increasing revenue at rates north of 30%, against average single-digit rates for CarMax. Some analysts see Carvana taking the lead in revenue several years from now.

Garcia helped found Carvana in 2012 while working at DriveTime Automotive, formerly Ugly Duckling, specializing in risky buyers and founded by Garcia’s father, Ernest Garcia II. There is a turbulent history; as a real estate developer in Arizona, the father pleaded guilty to one count of bank fraud in 1990 for a small role in the savings and loan crisis of the 1980s. And DriveTime was fined by regulators in 2014 for collection practices.

Today, DriveTime and Carvana, both based in Tempe, Ariz., Are run separately by the two men, but have a business relationship that, as Carvana’s annual report says, was “not negotiated unrelatedly. of dependency ”.

The challenge for the young Garcia will be to continue to build the image of Carvana as

Amazon.com

used car trade, while avoiding less pleasant industry practices. Carvana provides its own financing and claims that the credit performance has been strong, but also that it sells loans after making them.

How big can Carvana become? CEO Garcia says “over two million” vehicles per year. The two million, he says, come from extrapolating current trends. The most stems from the fact that the US used car industry is fragmented and huge, with 40 million vehicles sold per year.

“When you start a business, and especially early on,” he says, “it’s hard to project what the dream might ultimately be. ”

Write to Jack Hough at [email protected] Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.



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