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Why Carvana Surged 16% in May

By Andrew Tseng – Jun 8, 2020 at 5:54PM

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The online used car retailer's business model is well-suited to the current world.

What happened

Shares of Carvana (CVNA -2.85%) rose 16.1% in May, according to data from S&P Global Market Intelligence, taking the stock from $80 per share to $93 per share. For context, that came on the heels of a massive rebound that had already lifted the stock up from its pandemic-plunge low of just $29 per share.

So what

On May 6, the online used car retailer reported encouraging first-quarter financial results, which contributed to the stock's surge. In the quarter, the company sold 52,427 cars to its retail customers for year-over-year growth of 43%. Sales had been exceeding prior expectations up until mid-March, when demand slowed down substantially. This continued into April when retail used car unit sales fell approximately 30% year-over-year early in the month.

However, in the weeks since then, sales rebounded to approximately 20% to 30% year-over-year growth, which the company believes is far better growth than the rest of the industry is experiencing.

A young woman sitting in a car being handed the keys.

Image source: Getty Images.

Clearly, the company's online used car selling model and the "touchless delivery experience" it implemented in March are helping the company rapidly gain market share within the U.S. used car market.

In addition, Carvana also shored up its balance sheet by selling $600 million of new Class A common shares to certain existing shareholders, including $25 million each to Earnest Garcia III, the company's founder, and Earnest Garcia II, the company's largest shareholder. 

Now what

While no one knows exactly what the future holds for the economy or the used car industry, Carvana is well-positioned to continue to gain market share.

In normal times, the company's rapid growth and market share gains can be attributed to its extremely large used car selection, an entirely online and home delivery experience, and its competitive prices. Those attributes are even more compelling during the COVID-19 pandemic. Investors should consider Carvana a clear long-term winner and potentially 2020's best profit opportunity

Andrew Tseng owns shares of Carvana Co. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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