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Here's What Drove Carvana's Blockbuster Q2

By Daniel Miller - Aug 14, 2019 at 9:19AM

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Carvana's second quarter was impressive in many ways, but here's what drove the excellent quarter and what investors should watch down the road.

Carvana (CVNA 2.10%) is no stranger to blockbuster financial results and high-flying top-line growth during many of its quarterly reports. And investors who were savvy enough to scoop up shares during its April 2017 IPO have witnessed the company's near 600% stock price increase over its time as a publicly traded company. The stock price's most recent pop came from another strong second-quarter result that included a significant milestone for the company and its investors.

Let's dig in to what drove Carvana's blockbuster second quarter.

Impressive figures

No matter how you break it down, Carvana's growth figures during the second quarter were nothing short of impressive. In fact, the second quarter marked the 22nd straight quarter of triple-digit revenue growth as revenue checked in with a 108% increase to just over $986 million, topping analysts' estimates that called for $921 million. Retail units jumped 95% to 44,000 units, and adjusted net loss per share was $0.40, a better result than analysts' estimates of a $0.43 loss per share.

Carvana's Greensboro car vending machine

Carvana's Greensboro car vending machine. Image source: Carvana.

Carvana's top- and bottom-line results beat estimates, but what really drove the stock price and investor excitement higher was gross profit per unit (GPU). Total GPU, excluding stock gifts, jumped a massive $1,002 up to $3,175 during the second quarter, compared to the prior year. That is a massive improvement, and it also crossed management's mid-term target set at $3,000 GPU. Carvana's $3,175 GPU will be difficult to sustain during the back half of 2019, but the results should easily top the first quarter's $2,429 GPU. Management expects full-year 2019 GPU in the range of $2,650 to $2,850, well above 2018's $2,133 GPU -- a fantastic improvement.

If you're wondering what drove the surge in GPU, it wasn't one specific development. Carvana recorded a significant jump in retail GPU, wholesale GPU, and other GPU thanks to a reduction in average days to sale, from 66 down to 61 days, incremental shipping revenue, an increase in the number of customer-sourced vehicles, and improved loan monetization. The second-quarter's impressive GPU is just the latest improvement in the metric over the past five years of consistent growth.

Line graph showing annual increases in Gross Profit per Unit.

2019E* shows management's estimated range of GPU. Image source: Carvana.

What will drive Carvana's future?

Carvana's long-term goal is obviously to reach profitability, but right now, the company is focused on driving toward that future in two key ways: increasing retail sales and network reach. More specifically, Carvana is focused on expanding its reach of the U.S. population (which helps drive total retail units sold), driving incremental retail sales through improved processes, and increasing brand awareness in existing markets.

The good news is, Carvana is doing extremely well in expanding its retail and reach. In fact, Carvana's 44,000 retail units during the second quarter almost matched the 44,252 total retail units during all of 2017. Further, Carvana continues to add markets served, which has driven its total U.S. population coverage from 19.7% during 2016 to 67% by the end of 2019.

Bar graph showing Carvana's estimated markets to reach 145 at the end of 2019.

2019E* shows estimated markets at end of 2019. Image source: Carvana.

There appears to be significant upside with Carvana's potential as the company has proven the longer it remains in markets, the higher its market penetration moves -- it's nowhere near market saturation. For instance, Carvana's first market, Atlanta, recorded a 26% growth in market penetration during the fourth quarter of 2018, compared to the prior year. That moves Carvana's Atlanta market penetration to 1.94%, compared to its 0.36% 2018 market penetration across 85 total markets. Essentially, Carvana is selling more total cars as it enters new markets, while it's also selling incrementally more vehicles the longer it operates in a market, and that's a great scenario for investors. 

What it all means

Carvana turned in an impressive second quarter highlighted with growth in a slew of important metrics. The company isn't slowing down and continues to improve GPU while also expanding its reach and improving its market penetration. One day, Carvana's hardly believable stretch of quarters with triple-digit revenue growth will come to an end, but if management keeps improving its business the way it has, that day could also bring investors much closer to profitability. Unless Carvana hits a speed bump on its road to growth, don't be surprised if it continues to release blockbuster quarterly results.

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