Carvana is the country's third-largest retailer of used cars, but its business model is completely different than that of traditional car dealers.
For starters, it doesn't even have dealership locations. Instead, it's an entirely online selling model whereby customers browse its 22,000+-vehicle inventory on the company's website. After just a few clicks, customers can select their car, arrange financing, arrange their trade-in if they have one, and have the car delivered straight to their door or to one of the company's patented car vending machines. And the seven-day return policy, which is effectively a seven-day test drive, is increasingly making customers comfortable buying the cars sight unseen.
Carvana is just getting started because the U.S. used car market is very big and highly fragmented. In 2017, the used car market size was an estimated $764 billion. But no single company has anywhere near a significant market share of that. For example, used car industry leader CarMax (NYSE:KMX) has about 2% national market share, and the top 100 used car retailers represent just 8.6% market share. It's been hard for any traditional player to gain meaningful market share because growth has always required expensive new dealership locations, each of which only serves a local market.
In contrast, Carvana pools its national inventory and makes it available to anyone within the markets it serves via its nationwide delivery infrastructure. By serving virtually the whole country from its single online store, Carvana could be the first used car retailer to gain significant share of the industry.
It's already well on its way. In the company's oldest market, Atlanta, it already has over 2% market share after just seven years in business and continues to grow strongly. Given that CarMax has 2% share nationally, it's reasonable to think Carvana could replicate its Atlanta success nationwide, which suggests it could become the country's largest used car retailer in due course. That's one reason why the stock could be 2020's best profit opportunity.
Spotify is the world's largest audio streaming platform, with 286 million monthly active users ("MAUs"), including 130 million paying Premium subscribers. The company has taken the world by storm since its launch in Sweden in 2008, and continues to grow its user and subscriber base rapidly. Last quarter, Spotify grew its user base by 32% year over year and its Premium subscriber base by 30%.
Spotify skeptics tend to assume the company has a disadvantaged business model because the big three major music labels control most of the rights to the music Spotify licenses. Given that Spotify pays a large percentage of its music streaming revenue to the labels and other rights holders, many assume there's a limit to how profitable the company can be.
But that view is short-sighted. For one thing, Spotify is aggressively expanding into non-music audio, specifically podcasting, in which it doesn't have to deal with a supplier base with such a stranglehold on the majority of content. Spotify has been developing and acquiring its own original podcast content, including its recent acquisition of The Ringer. Owned podcasting content is a fixed cost, which means the revenue associated with every additional listener is extremely profitable. After all, Spotify doesn't have to share that revenue with anyone else, unlike in its music agreements.
Spotify is just getting started because its 286 million MAUs are a small fraction of the long-term total addressable market. There are billions of people worldwide who are likely to listen to streaming audio one day, and Spotify is likely to be the biggest beneficiary of that adoption trend. And the recent exclusive podcast agreement with Joe Rogan should only accelerate the company's already-rapid user growth rate.
Zillow Group is only scratching the surface of its long-term opportunity. The company's lineup of real estate brands makes it the largest real estate portal in North America, which makes it very valuable to real estate agent and broker advertisers who use the site to generate leads.
But Zillow's foray into iBuying has the potential to truly super-charge what Zillow could be over the long term. And it's not about profiting by "flipping homes," as many skeptics suggest. Instead, it's about being a real estate marketplace positioned at the heart of the transaction. The company intends to facilitate more transactions by helping sellers sell their homes much more conveniently and easily than ever before. And by facilitating transactions, rather than leads, Zillow is likely to build big service businesses, including mortgage origination, title insurance, closing services, renovation services, moving services, and other adjacent services. The company is likely to make far more money on those services than from the profit it makes buying and selling houses.
Zillow is just getting started because the U.S. residential real estate market was worth $1.9 trillion in transaction value in 2019. The company is best able to attack that market thanks to its position as the No. 1 real estate portal. Its cash-rich balance sheet doesn't hurt either during these uncertain times. Growth-oriented investors should be paying attention.