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Why Carvana Jumped 35% in November

By Andrew Tseng - Dec 7, 2020 at 7:33PM

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Investors warmed up to an encouraging third-quarter earnings report.

Shares of Carvana ( CVNA -0.11% ) jumped 35% in November, according to data from S&P Global Market Intelligence. That move sent the online retailer of used cars from $185 per share to $250 per share during the month.

Carvana shares have been on a tear in 2020. The stock is up 172% this year through November, and up more than eightfold from its March low. 

What happened

Carvana reported its third-quarter earnings after the market closed on Oct. 29. After the stock declined the following day -- the last trading day of October -- investors have since apparently warmed up to the company's earnings report.

After all, there was a lot to like. Carvana's efforts to increase the number of cars it buys from customers -- as opposed to at auction -- have paid off recently. In the third quarter, 56% of the cars it sold to retail customers were originally bought from other Carvana customers. This is already ahead of the company's 38% to 52% long-term target for this metric.

Aside from that, the company is continuing to grow rapidly. The company sold 64,414 cars to retail customers in the quarter, which represented 39% growth compared to the same quarter in the prior year. Revenue grew 41% on the same basis. 

A driver holds up the keys to a car while sitting in the driver's seat.

Image source: Getty Images.

So what

Buying more cars from customers is critical because the company can make $500 to $1,000 more on cars it acquires from customers. It's a much more profitable vehicle acquisition channel because it typically isn't bidding against many others, like it does at auction.

As Carvana grows, it continues to build out its capacity ahead of demand. The company opened its 9th inspection and reconditioning center (IRC) during the quarter and its 10th shortly after the quarter ended. It also intends to open its 11th IRC before the end of this year.

These 11 IRCs will give the company the ability to buy, spruce up, and list for sale on its website a total of 600,000 cars per year at full capacity. For context, Carvana has only sold 171,939 cars to retail customers so far this year. Clearly, the company is anticipating enormous growth in the years ahead.

Now what

Carvana pioneered the online used car retailer model and has grown at a blistering pace in the years since. While it had a hiccup earlier this year due to COVID-19, the pandemic has ultimately helped normalize buying a car online. Investors should consider the company's superior model and the huge, fragmented market it competes in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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