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3 Key Takeaways From Carvana's Explosive Q3, and 1 Thing Investors Must Watch

By Daniel Miller – Nov 10, 2018 at 2:15PM

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From stunning growth to an acquisition and a widening bottom-line loss, here's what you need to know.

Shares of Carvana Co. (CVNA -3.09%), an online automotive retail platform technology company, jumped 15% after hours on Nov. 6 after the company released strong third-quarter results. While it slightly missed bottom-line estimates, it soared past top-line estimates. Yet there is valuable info beyond the highlight figures -- let's dig right in to the key takeaways, and one thing to watch.

Explosive growth

Investors are clearly OK with Carvana's bottom line widening as long as the company generates incredible top-line and gross profit per unit (GPU) growth -- and it has. Just look at some of these third-quarter figures: Retail units sold jumped 116%, compared to the prior year, total revenue jumped 137%, and GAAP gross profit increased 181%. Carvana tallied its 19th consecutive quarter of triple-digit unit and revenue growth. In other words, Carvana has grown so quickly that it sold more units during the third quarter than it did in all of 2015 and 2016, combined.

Just as important as its units-sold growth, if not more important, is GPU growth. Its total GPU ex-gift -- in celebration of selling its 100,000th vehicle, Carvana's CEO is donating 165 shares to each current employee at their one-year anniversary, and it's slightly impacted some figures -- jumped from last year's $1,742 up to $2,302 during the third quarter. Its $2,302 total GPU is the highest-ever quarterly total and one large step closer to its $3,000 target. The big takeaway here is that investors are willing to watch the company's bottom-line loss widen as long as the company is putting up incredible growth figures -- for now, the stock price will likely go as its top-line growth goes.

Night view of Carvana's nine-story automated car vending machine.

Image source: Carvana.

Propel acquisition

With some of the stunning growth figures, it's easy for investors to skip over the announced Propel AI acquisition. Propel is an artificial intelligence communication platform that delivers messages to consumers involved in the automotive retail process; here's a demonstration. The benefits of acquiring Propel are clear: Add talent and technology. As Carvana improves and integrates the platform, it should lead to better engagement with consumers looking for vehicles and increase incremental sales from its consumer base. As far as talent goes, the acquisition brings on board a highly experienced product and technology team; all are joining Carvana full-time, including Tom Taira, co-founder and ex-chief product officer at TrueCar (TRUE -1.22%). The takeaway here is simple: One of the only ways to carve out a competitive advantage in the online auto retail space is to have a more effective, more engaging, and more informative technology platform. The Propel acquisition will help Carvana create a better platform. 

Image of man on mobile phone with keys and cars in the background.

Image source: Getty Images.

Fueling future growth

You don't record 19 straight quarters of triple-digit revenue and unit growth without consistently adding fuel, and Carvana continues to do just that. Carvana opened in 13 new markets and two vending machines during the third quarter, which brought its total to 78 and 14, respectively -- the company has already opened in four new markets during the fourth quarter, bringing the total to 82. Not only is Carvana adding market coverage, it's accelerating the pace at which it does so. The company's full-year outlook is to open in 40 markets in 2018, a much more rapid pace than the 23 it opened during 2017. When the book is closed on 2018, new markets should expand Carvana's reach to 57% of the U.S. population, up from 52.8% at the end of the second quarter of 2018. The takeaway here is that to live up to its valuation, Carvana must continue to fuel growth for the foreseeable future, and it can do that by continuing to accelerate the markets it enters annually.

Graphic showing a steep climb in Carvana's markets entered.

Graphic source: Carvana's Nov. 6, 2018 Q3 letter to shareholders.

Buying cars directly

If you haven't used Carvana, you might be surprised to know the company hasn't focused on buying your vehicle, or trading. That's changed over the past year, and quickly. During the third quarter, the number of vehicles Carvana purchased directly from its consumers jumped 273% compared to the prior year. In other terms, the percentage of retailed vehicles sourced from its customers reached 16%, compared to only 6% during the first quarter of 2018. This business remains an emerging segment for Carvana, and currently management is focused on experimenting with business models, figuring out how to execute profitably, and learning just how lucrative it could be.

We won't have answers for how lucrative this business line will be for a while, but however it ends up for Carvana, the truth is that it does offer value to make a more seamless buying, trading, and selling online platform -- rather than only offering vehicles for sale. That's why this will be something investors need to watch. If this business ends up producing better margins than purchasing vehicles from auction, or other methods, it could be a catalyst to help Carvana turn a profit sooner rather than later.

All in all, this was a phenomenal quarter for a company that has surged 163% higher year to date. Carvana trades at a lofty valuation, hasn't turned a profit, and faces challenges such as building its network quickly and efficiently while keeping costs in check. So far, Carvana has proven it can enter markets cost effectively and provide investors with a consistently impressive growth story, and that's why the stock continues to move higher despite a widening bottom-line loss.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool recommends TrueCar. The Motley Fool has a disclosure policy.

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