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How Carvana Is Disrupting the Used Car Industry

By Neil Patel – Jun 1, 2020 at 8:29PM

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Buying a car will never be the same.

You've probably seen the commercials on TV of those massive vending machines that hold automobiles instead of snacks and beverages. These belong to Carvana (CVNA -10.18%), a new kind of used car retailer that wants to "change the way people buy cars." The entire process is extremely easy and stress-free. Customers can search for cars, do virtual, 360-degree tours of the inside and outside, obtain financing from Carvana or a third party financial institution, and complete the entire purchase on the company's website. Cars can then be delivered directly to a buyer's home or can be picked up at one of the 24 previously mentioned vending machines that are located in major metropolitan areas across the U.S.

It appears that Carvana has so far succeeded at improving one of the worst shopping encounters we experience in our lives. According to the company's May 2020 investor presentation, 81% of consumers do not enjoy the car buying process and 8% of consumers rated car salespeople highly trustworthy. This shouldn't come as a surprise. Since the company's beginning more than seven years ago, Carvana has done so well that 96% of its customers would recommend the service to a friend.

woman shopping on laptop with card in hand

Image Source: Getty Images.

In the quarter ended March 31st, revenue and units sold both increased more than 40% compared to the prior year period. While these numbers were impressive, CEO Ernie Garcia said that "we began to see significant reductions in demand in the back half of March with a sales trough in early April at approximately 30% reduction in sales year-over-year." Since then, demand has begun to improve considerably week after week. Unable to purchase cars through traditional dealerships due to the coronavirus pandemic, shoppers went online. The stock has been on a similar roller coaster ride, rallying more than 200% after falling 73% from February 21st to March 20th.

The future of car retail

Any fragmented industry that has historically provided a terrible customer experience is always ripe for disruption. Rather than spending an entire day haggling on price with an unpleasant salesman, purchasing a car with Carvana can take as little as 10 minutes after vehicle selection. Customers who aren't satisfied are protected by a 7-day money back guarantee. The company boasts having the best selection of vehicles with over 33,500 cars available, and estimates average savings per vehicle of $1,000 compared to traditional dealers.

The onset of the coronavirus pandemic was initially met with tremendous pessimism and uncertainty. As we navigate these unprecedented times, we ask ourselves what life will look like in the future. E-commerce is a trend that is going to accelerate and become an even bigger part of our day-to-day lives. It was once unthinkable to make a big life purchase like a car online, but Carvana is here with a seamless solution. The company is offering touchless delivery and is letting customers go 90 days without making their first payment. This is just another way Carvana is providing peace of mind during a challenging time.

Long-term outlook

It's difficult to recommend investing in a company that is currently losing money, but Carvana is clearly gaining market share and is on its way to profitability. The largest dealer brand in the U.S. has a 1.8% share of the used car space. Carvana, a relatively new entrant in the industry, has market penetration of greater than 2% in its oldest market of Atlanta. This is evidence that the company is quickly gaining ground in the cities that it serves, especially at a time like this when traditional dealers are playing catch-up in attempting to build out an online sales infrastructure that Carvana has already mastered.

As people gain more information and become better-equipped consumers, delivering an outstanding customer experience is necessary for a company to build and sustain a competitive advantage. With a 4.7 out of 5 star rating from over 53,000 customer reviews on its company website, Carvana strives at putting the customer first. I'd recommend spending some time studying the business before adding it to your portfolio. With parabolic growth of key metrics likely to continue, Carvana has the true makings of a compounder stock.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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