It's been a wild ride for early Carvana (CVNA +0.44%) investors, with its recent initial public offering (IPO) followed in short order by its first earnings report and even a surprise acquisition. Despite the optimism and excitement, the company's mission is no small task: It hopes to change the way people buy cars by removing traditional dealership infrastructure and replacing it with a unique vending machine or online purchase with a fully transactional website and delivery option. So far, it's impressed investors with early results; let's dig into the second-quarter data and see what to expect from Carvana's recently announced acquisition of Carlypso.
By the numbers
As expected with young growth companies, Carvana's revenue continues to soar. The company reported record revenue of $209 million during the second quarter, which was a staggering 142% increase over the prior year. Retail units drove revenue higher, with Carvana recording a 145% increase in units sold to 10,682. Total gross profit checked in at $16 million, a sizable increase of 166%, and even better yet, its total gross profit per unit jumped to $1,501, a $332 increase over the first quarter of 2017. But with rapid growth comes rising costs, and the company's ambitious expansion into seven new markets increased its net loss by 115% to $38.9 million, or $0.28 per share.
Carvana's Houston vehicle vending machine.
Carlypso acquisition
After expanding to 33 markets and boasting five incredibly unique car vending machines, Carvana management decided it was time to jump on a new acquisition opportunity: Carlypso. Carlypso started as a peer-to-peer car selling service -- with the goal of helping customers avoid getting ripped off selling vehicles to dealerships and making the sale process to other peers simpler -- and has slowly evolved into an online depository of a wealth of vehicle information and pricing data.
"You can't learn anything without data, that's the core ingredient," Carvana co-founder and CEO Ernie Garcia III told Fortune. "Then you have to have great analysis. So Carlypso was great at acquiring data using all these different tools, and they were great at analysis to figure what options were on these cars and what these options were worth."
Eventually, Carlypso's reach expanded and it was analyzing over 200,000 cars daily, essentially turning the company into a vehicle-oriented big data and analytics business. For Carvana, this offers a perfect opportunity to acquire Carlypso's tools and insights to better price vehicles locally, at a time when Carvana is expanding into new markets, which should help the company improve gross margins and inventory turnover.
Why it matters
You might not think this acquisition brings much to the table for Carvana, but efficient pricing information is critical to its core business. Consider that used-car retailer CarMax has built a competitive advantage by collecting pricing data for decades, historic data that's not easily acquired by newly formed companies. That pricing information enables CarMax to sell 97% of the vehicles it takes to auction compared to the 60% sold by other dealership groups or entities, per Morningstar.com. That example serves only to show the impact on inventory turnover that pricing information can have between companies that have valuable pricing data and those that do not. Carvana will need to walk a fine line of keeping high enough prices to generate solid margins and efficient enough prices to increase its inventory turnover, and its Carlypso acquisition could be the key to finding that critical equilibrium.
"We've admired what Carlypso has been doing from a distance, and when they walked us through the technology, we realized how unique their solutions were," said Garcia in the press release announcing the acquisition. "Seeing Carlypso's ability to scour disparate data sources to better understand each vehicle, to leverage that data to understand the relative value of vehicles and to turn that into actionable intelligence in real time with local market context to efficiently acquire vehicles on behalf of customers, made it clear to us that we would be a great team."
Carvana is an intriguing investment opportunity as the U.S. new-vehicle market plateaus. Currently, with a wave of off-lease vehicles set to hit the markets, it could set Carvana up nicely to bulk up its inventory and expansion plans -- because the excess supply should drive used-car prices lower -- and utilize its recent acquisition to generate better margins than its competition, even with lower prices. Right now, though, investors' focus should certainly be on the company's top line in hopes that it can continue to drive revenue significantly higher. And if the second quarter is any indication of Carvana's future, it's certainly on the right path.
