Carvana (CVNA -1.85%) has not only been one of the hottest automotive stocks, it has also been one of the most explosive, trouncing the S&P 500's 26% gain with a 582% surge in stock price since its April 2017 IPO. Some investors might want to take profits, and other investors might shy away after its initial run-up. But here are 10 reasons you can consider buying Carvana now and never selling.
1. Proven top-line growth
One reason you buy a stock and never sell is because it has a compelling growth story. We'll get to Carvana's long-term growth story below, but what's clear is that the company is already thriving. Retail units sold jumped by 95% during the second quarter, which drove revenue 108% higher. And, no, that wasn't a one-hit wonder -- it was the 22nd straight quarter of triple-digit revenue growth. Its sales growth has been so lucrative that Carvana sold almost exactly as many cars during the second quarter as it did through all of 2017.
2. Proven bottom-line growth
It's not just the top line and retail unit sales that are growing; gross profit per unit (GPU) jumped a staggering $1,002 to $3,175 during the second quarter, as the company works to improve operations and profitability per unit. The surge in second-quarter GPU occurred across all parts of the transaction: through warranty protection and financing services, by reducing average days to sale from 66 to 61, and by acquiring more customer-sourced vehicles (more on this in a bit). What's almost as impressive as the second-quarter surge in GPU is the consistent improvement in the metric.
3. A proven entry strategy
Management has shown it has a playbook to enter markets successfully, and is doing it with increasing efficiency. In fact, it recorded its two largest quarters in company history in terms of market openings in the first half of 2019. That shot its market total from 85 at the end of 2018 to 137 at the end of the 2019 second quarter. While opening a car vending machine is different (and more expensive), Carvana has a proven ability to enter new markets through a less capital-intensive delivery strategy that plugs into its existing logistics network and marketing program.
These first three reasons to own Carvana prove its business is already thriving, but let's take a closer look at why the used car retailer is unique and growing so well.
4. A market ripe for disruption
Most of us have trudged through the car buying process: It's exhausting, tedious, and little fun. The company's Introduction to Carvana presentation says that 81% of consumers do not enjoy it, and a paltry 8% of consumers rated car salespeople as highly trustworthy. With its transparent, quick, and easy online buying platform and delivery network, the used car retailer has created a much better consumer experience. With over 34,000 customer reviews through June 30, 2019, Carvana.com received a rating of 4.7 stars out of 5, and 96% would recommend to a friend -- not your typical grim dealership scores!
5. A better mousetrap
Even if a company spots an industry ripe for disruption, it needs a better mousetrap. In my opinion, Carvana's answer can be summed up in two aspects of its business: the process and the experience. It has a much simpler process than a typical dealership; by reviewing options and contracts online at your convenience, and with the ability to sign electronically, you can take your sweet time or complete a transaction in as little as 10 minutes. Furthermore, Carvana offers delivery as soon as the following day in many markets, a seven-day money-back guarantee to help alleviate concerns about buying online, and a selection of over 18,000 vehicles (compared with individual retailers that often only have about 100 vehicles).
Carvana's unique experience goes hand in hand with its better mousetrap to create better brand awareness and word-of-mouth marketing. It's hard to differentiate yourself from other dealerships, but Carvana does so with its car vending machines. Buyers use an oversize coin to operate a nine-story vending machine to deliver their vehicle. In an age of social media moments going viral, it gives buyers a fun and shareable experience (the new "word of mouth") that differentiates Carvana. One example: After it opened its Nashville vending machine, its market penetration more than doubled within the first two quarters.
The previous three reasons to own Carvana emphasize why it's doing so well with its car vending machines, more-enjoyable user experience, and quick and transparent online-buying platform. But where will this ride take investors next, and how much road is left untraveled?
7. Market penetration
Investors often lose sight of the growth potential sitting right under Carvana's nose. Sure, it's easy to see the growth story as it continues to open up new markets at a staggering pace, but we forget that the company still hasn't hit its full potential in existing markets. At the end of 2018, its first market, Atlanta, posted 26% year-over-year growth in market penetration -- and it still only owns a 1.94% market share. As you can see in the two graphs below, Atlanta still has room to grow unless it suddenly plateaus, and there are plenty of newer markets where Carvana has yet to even scratch the potential shown by Atlanta.
8. Are we there yet?
Some figures help emphasize long-term potential. Management made an intriguing point about how fractured and large the automobile dealer market is: It's the largest consumer retail vertical in the U.S. with over $1 trillion in sales, yet the leading retailer owns roughly 2% market share. That pales in comparison to other retail markets, where the leaders claim anywhere from a 10% share to as much as 50%.
If companies such as Carvana help push industry consolidation and/or mergers and the market becomes similar to other retail markets over time, management believes the top two players could account for 31% and 17% of the market sales, implying annual unit sales of 12 million and 7 million, respectively.
While that may never come to pass in the auto dealership industry, management's goal is to reach 2 million in annual sales, which leaves plenty room to grow from 2019's retail sales estimate between 167,500 and 172,500 units.
9. New growth opportunities
Carvana is still in the early innings of its long-term growth story, and it has plenty of new opportunities. One fantastic example is its recent trend of purchasing consumer vehicles even if those consumers weren't buying a vehicle from the company at the time. That sounds boring, but reselling consumer-purchased vehicles is more profitable than reselling vehicles purchased from auctions. And this strategy has taken off: Carvana's consumer-purchased vehicles were up 232% during the first quarter of 2019, representing 40% of retail units, compared with 24% of total retail units a year earlier.
It also has untapped markets in entire geographical regions in the West, Northwest, and Midwest, since it currently operates primarily along the East Coast and in the South.
10. The long term offsets a cyclical business
The final reason to hold Carvana long term is a simple one: to help offset the notoriously cyclical nature of the business. As you can see in the graph below, using light-vehicle sales as an example, there are peaks and valleys, lengthy periods of plateaus, and unpredictable drops in auto sales such as during the Great Recession.
Trying to time auto stocks and their surges or swoons would be futile, which is why buying shares of Carvana at a price you feel is a value and holding it long term is important. Only a "never sell" approach can offset the industry's cyclical nature.
There you have 10 excellent reasons -- ranging from proven strategies, differentiators from competitors, and long-term potential -- for why you can buy shares of Carvana and never sell.