Www Carmax Com Used Cars – When you think of a pleasant shopping experience, you might not think about a used car. Carvana (NYSE: CVNA) is working to change it. The company, which went public last year, took one of the most unpleasant purchases we made and placed it online. Browse online, buy online, financial online, and get used cars sent to you – all without hours of bargaining and physical shopping.
In this Industry Focus episode: Consumer Goods, analyst Vincent Shen and Fool.com contributor Asit Sharma jumps into the company – his long-term strategy, where it is now, and the most important numbers and trends of this quarter’s earnings report. Tune in and find out what makes Carvana very interesting, what risks that investors need to pay attention to, which metrics to focus on each quarter, and more.
Www Carmax Com Used Cars
1 share that we like is better than Carvana Co.
Motley Fool CEO Tom Gardner has just issued a rare “double down” purchase warning in one of California’s remarkable companies.
And this is the real tweet …
Despite the surprising success of this company over the past few years, most investors have never heard of the name of this company!
That’s right, while everyone on CNBC is busy talking about blue-chip stocks like Apple and Facebook, the company is significantly smaller (but growing faster!) It flies almost completely under the radar.
And Tom was very sure that he was right with the warning of buying this new “double down” … that he got $ 523,111 from The Motley Fool’s money on the phone …
Vincent Shen: Welcome to Industry Focus, podcasts that go into different stock market sectors every day. I am your host, Vincent Shen. This is Tuesday, November 20. Joining me for this event through Skype from beautiful Raleigh, North Carolina is Motley Fool’s senior contributor, Asit Sharma. Hey, Asit, glad you can join us.
Asit Sharma: Hi, Vince, thank you for picking me up. I really appreciate that. Nice to be here.
Shen: Amazing. I had to start the show with a few announcements. First, head to the listener that Shannon and Nick will take their day off for the Health and Energy and Industry podcast this week. Industry Focus will take back on Friday with a special episode from Dylan. We will continue our usual programming schedule next week. Listeners, on behalf of the entire Industry Focus team, our producer, Austin, all of our Foolish contributors – have an incredible Thanksgiving vacation! We are very grateful for your support. You are truly extraordinary.
This latest update is a difficult one for me. Today will actually be my last day in the studio as the host for the Industrial Focus. After four fantastic years with The Fool, my wife and I packed our bags, going for a new adventure in Taiwan. Our passion is moving, I just want to say I will really miss getting into this chair every week, sharing and learning about new companies together. To everyone who has watched the program, whether it is only for one episode or every week; for everyone who has written with questions, suggestions, feedback; for all my guests; for our extraordinary, beautiful producer, Austin; to Dani and the video team – thank you very much.
This may be my last day in the studio, but you will still hear my voice through the rest of 2018. I have left the IF crew with some shows waiting in the queue. The New Year will come with new hosts, but you will still hear from the stupid contributors you know and love, such as Asit and Dan Kline. And, who knows, maybe I will be lucky enough to make a special appearance in the guest chair on the street.
Without being too sappy, Asit, we have a new name to be considered by listeners. Today, we will get a new way to shop for cars thanks to Carvana, CVNA ticker. I have no good reason why we took so long to introduce this company to the Industrial Focus. Now I have the opportunity to see 10-K, read some income calls, this seems like a very cool business. I like how it changes the way people approach what is often one of the biggest purchases they make in their lives. Carvana is a fairly young stock. This is the price of the initial public offering in April 2017. It was several years after it was spun by the former DriveTime holding company. As a public company, this company has a slow start outside the gate. IPO price of $ 15 per share. In the first few months, stocks really fell below $ 10. But then, Carvana reported its first fiscal quarter results in June, and since then, has enjoyed a steady climb to a peak of $ 65 per share just a few months ago, before falling to the current level of around $ 45. That’s still more than 125%, and a very impressive performance in 2018.
The excitement investors have for this company is how it has changed used car shopping and trading experience in its head with e-commerce solutions that are more technology-focused. Asit, can you tell us a little, very quickly, about how the buying process works if you shop for cars with Carvana?
Sharma: That’s right, Vince. However, before I did it, I wanted to quickly say that in the past few years I had the opportunity to be a guest on the show with you, that’s the biggest growth professionally I’ve ever experienced, is to do this event with you. I want to speak on behalf of investors, listeners, we will miss you, your truly sharp insights are delivered in a calm and rational tone that is so fun to listen to. We hope to see you. Again, you and I had dinner a few weeks ago, I hope that one day I will personally go to Taiwan and have dinner with you there.
Shen: I appreciate it, friend!
Sharma: You understand, I appreciate you. To answer your question, a quick overview if you are not familiar with Carvana, this company allows you to complete the whole experience of buying cars online. This is amazing for me, being rather middle-aged, because I often joke. I have a young friend that I mentioned earlier on this show, named Brandon Stokes. He is a millennium investor. I learned about the companies going forward from him. I first heard about Carvana from Brandon, who had just bought a used car through this service. It’s very difficult for someone who has experience buying a car, is used to entering and bargaining with salespeople, and then has to sit at a desk and work if their financing is better than what my bank has, to think that you can search for cars online using Carvana technology – they have a patented 360 degree virtual photo tour for each vehicle. You can view car reports online, see whatever specifications you want. Then, you can have financing offers presented to you very quickly online from Carvana. You can finance used vehicles through them. You can view your contract in minutes online and sign it, if you want, electronically. Your car can be shipped. Or, if you live in a city where Carvana has a patented carousel, you can go for this event, which is quite extraordinary, this is a vending machine. We have one in Raleigh, so I went there to see it. A truly elegant and transparent building. The car you ordered will come out of the car vending machine and you can drive it home.
That is the service briefly. This removes all human interactions, except the touch you want. You can call Carvana and get sales assistance. People are very friendly when you go to the dealer to get your vehicle. But you can see how this appeals to the millennium mindset. We have talked a lot about this event how the millennial generation, the younger generation, like to do business through the application. Not because they don’t want to interact with other humans, [laughs] but they appreciate the convenience of being able to do everything in online transactions. This is a service aimed at the younger generation, who will only have more purchasing power over time.
Shen: I would say that I was driving by one of Carvana’s Vending towers for the first time, actually, just a few weeks ago. There is a location near D.C., in this area. This is really cool. I did not realize – again, not following the company at the time – that this had sprung up. I think there are 14 of them now in the US. This looks really cool. I searched for some videos on YouTube about how the process was taken as if you were buying a car and you went to one of Vending’s towers. They give you these big coins, you drop them in the slot, and then the car goes down like a conveyor belt. Very cool. Worth watching on YouTube, get an idea of what that experience was like. I think it’s good to build a brand and offer something very unique and fun for car buyers in a place that is historically a tense experience, when you go to a used car and do it that way.
Based on some of the recent acquisitions that have been made by the company, the main opportunities management tends to pursue for Carvana, their single focus here, as you have already mentioned, is to streamline the experience of buying a used car so that it is not something people are afraid of. The used car salesman base is still a joke for a reason. With Carvana, you can do all this shopping from your sofa. You see an inventory of more than 11,000 vehicles. There is a 360 degree virtual tour of the interior and exterior that you mentioned. They even highlighted any defects in the car in that regard. After you make your choice, you can complete the payment process in just ten minutes. Carvana can handle financing for your used car. They do that for most of their buyers. Cars can be sent as soon as possible the next day, and each car is equipped with a seven-day money back guarantee, so you can return it for any reason for a full refund. I have just gone through the process of buying cars twice so far in my life, but that sounds like a very sweet deal, frankly, compared to what usually happens.
On the other side of that, I want to move now to talk about a little supply chain for Carvana, and how this business model is proven in finance. The company acquired its inventory from its own customers, from auctions, and from rental companies with this large fleet. In the process, they filter, they analyze these potential units to determine the right price, how they fit into their existing inventory. The company said that every car they got from the auction to be sold to retail customers was purchased without being seen. These are examples of very powerful company processes and data for making smart purchasing decisions for inventory inventory. For each vehicle, CEO Ernie Garcia said, Carvana would provide about $ 1,000 parts and energy into the car at the inspection and reconditioning center before taking photos, and then the image he used to register the vehicle on his website. After the car is sold, we mention how it can be sent directly to you, you can go to the Vending tower, there are several choices there.
Everything I’ve explained so far is for the retail business side, which is the biggest part of Carvana’s top line. Something to remember is, the company will also sell vehicles through wholesale channels with lower profit margins. Overall, if you have thought about how all these parts together in terms of buying experience, in terms of how Carvana operates alone, you will see that from this description, Carvana is an example of good vertical integration. Every step from procurement to fulfillment occurs in its own ecosystem. As a result, something that was also mentioned by the company, they collected a lot of data, and they used it to inform how they approached new markets, how they designed the experience of online shopping platforms, and more.
We have a big picture of how the company handles its business and the value offered to consumers. Next, we will discuss how all that flows into finance and a number of other things.
With the latest results from Carvana, you might be able to guess that everything looks good considering how the stock has tripled in the past 18 months. But I’m curious, Asit, what has jumped to you in terms of financial performance or anything else?
Sharma: Several things. One of them is this record of 19 quarters of three-digit growth in retail units and revenue growth. That’s a very strong statistic. This also speaks to the fact that the company is still very small. They just celebrated their milestone of 100,000 cars sold. After that, actually, CEO Ernie Garcia has given a stock grant to employees, worth around $ 36 million, to celebrate the milestone and make his troops rise. Stunning growth actually presents one thing that we often see in companies like this, which use data and technology to grow very quickly – the point is, at present, in a losing position.
But before we get to the bottom line, let’s look at this latest quarter, which is the third quarter of 2018. Sales increased 137% compared to the previous quarter to around $ 486 million. Gross profit increased 181% to $ 57 million. We will talk about gross margins and the way Carvana is rocky along with her gross margin because I think it is very important for investors to understand this going forward. But before we do that, let’s work to the bottom line. General sales and administration expenses increased 97%. Net losses before income and taxes increased 62%.
I only throw a lot of numbers at you, listeners. The big takeover here is that income grows at a rate faster than costs, so the company creates operating leverage. Although the net loss grew 62% year-on-year, from almost $ 40 million to $ 64 million, revenue grew at a higher rate, and that allowed gross margins to grow at a rate higher than the costs, which had followed. This is largely the cost of sales, general and administrative costs. And now, companies spend more on technology.
Let’s talk about gross profit, which is one of the very attractive value drivers for Carvana. The total gross profit per unit, or GPU, is $ 2,263. This company has a long-term goal of $ 3,000 GPU. That is a pretty good gross profit for a used car company, and that should allow that bottom line to approach equality over time. Carvana built this dirty margin is very interesting to me. The part near this lion comes from retail sales. If you take this amount around $ 2,200, about half of it comes from the used retail cars that they sell.
Another 47% comes from financial receivables. What happened, as Vince said to you, when you buy a car from Carvana, you are offered financing, often at attractive prices versus your bank. If you take the loan, the company then has this long-term financing receivable on its books. This will collect money from you month after month. Carvana combines this car loan, and sells it at a premium price without collateral. That means, if I or Vince stops paying for our car loan, it doesn’t return to Carvana. They don’t have to make that loss. It belongs to the person who bought the loan bundle. This is a business that is very profitable for the company. As I said, it supplies about half of the gross margin. Because Carvana has grown to more than 200 metropolitan areas, it is expanding its reach across the country, increasing the number of cars sold every month. That drives most of the finance and receivables it sells.
So, as a shareholder or potential investor, just pay attention to this GPU number because its footprint reaches $ 3,000.
Shen: That’s amazing, I’m very glad you mentioned the details for the GPU number and some of the mechanisms behind it. It is interesting to see that, for a full year, Carvana expects sales of their units to reach around 95,000, with revenues of $ 2 billion. Asit, sounds if I forget something. I know GPUs are big metrics whose management clearly speaks quite often. Some other things that listeners must track when they evaluate this business, the big ones that jump to me. The unit’s sales volume, seeing that number continues to go higher. Also, something like an average day to sell. Management has mentioned how those factors are, once again, the GPU number. More broadly, you mention the foundation for the number of markets that Carvana can enter. I will also follow the number of markets in Carvana. Also, ad spending.
To give you some perspective on how this GPU number has been tracked over time, the medium to long-term goal of $ 3,000 has increased very rapidly. This is surprising to see. You returned to 2014, when Carvana operated in only three markets. They said they had negative gross profit per unit of $ 200. Two years later, in 21 markets, with gross profit per unit of more than $ 1,000. Then, two years later, now, they start working closer and closer to the $ 3,000 goal.
With all that in mind, in the next part of this event, I want to look a little ahead to the horizon in several growth opportunities for this company. At present, Carvana is in 82 markets. They have 14 Vending Machines in the US now. The company said that they must be within reach by the end of 2018 of 56% of the US population. In terms of runways and geographic markets that are accessible to Carvana, the company focuses on 200 markets in the US with a population of more than 200,000 people. The current track, I see the map, seems to be more concentrated in the South, Southeast, and Middle Atlantic regions. Of course there are opportunities to expand it to other large markets in the United States.
It has a very repetitive model for doing that. Management mentioned how much it would cost the company only $ 500,000 to build a shipping market, while Vending Machine runs $ 5 million. But, with Vending Machines, even though investment is increasing, they see that the launch of Vending towers on the market will accelerate the results there. This builds a brand. Building a brand in a location that gets a lot of attention, builds some buzz in the local market.
Supporting the three-digit growth that this company can provide, Carvana also built a lot of the infrastructure needed to accommodate all of these extensions. In the process, they hope to also reduce transportation time and costs to buyers by expanding the national footprint. There will be new inspections and a reconditioning center that will be aired in Indiana in 2019. That will be the fifth. This expanded the company’s annual capacity to handle around 250,000 vehicles. That’s more than 2.5X unit sales expected in the full year 2018. Obviously, management is thinking, on the road, because they continue to grow their unit sales volume, how they will be able to accommodate and handle all of that inventory.
I want to place in the context of this company how big the market is in terms of vehicle sales, especially sales of used cars. I withdraw these numbers from investor materials provided by the company. Nearly $ 800 billion of used car sales in 2017, and only 7% of the market is claimed by the 100 largest used car retailers available. The biggest one has a market share of less than 2%. This is a very fragmented market. That gives many opportunities for companies like this.
There are some interesting comments from CEO Garcia about competition. He said, basically, given the large size of the market, this fragmentation among competition, even if there were new companies to include this more e-commerce oriented model for selling cars, would basically function to normalize the concept or idea of buying cars online. For some people, it still seems intimidating to not be able to see or handle or even drive the car you buy, thousands of dollars. Overall, because of that it is normal, even if there is some competition, it is something that is likely to lift the entire segment before it becomes a more traditional fight for market share.
The last few things that I will mention, used car sales are the main business driver for Carvana, but also experimenting with sources of more inventory from customers. The number of vehicles they will buy directly from their customers grew by more than 270% year on year in the third quarter. That makes about 16% of the company’s units sold through its retail channel. Something I want to convey, Asit, is all the acquisitions that have been made by the company in the last few years. I know that they are very focused on acquiring certain talents, certain abilities that support this platform that they have created. What do you think there?
Sharma: The company is now shifting its focus to technology. The final acquisition is the purchase of an artificial intelligence company, which will help facilitate more interaction on the site, as well as interaction via SMS. Carvana understands technology enough to get started, but utilizes the data they have, they want to be able to anticipate secondary questions that buyers may have, and be able to solve them quickly, and know buyers are slightly better than their data and suggest different options. Again, financing is one, if you think back to the GPU.
I think it’s a smart move. At some point, companies must build several competitive advantages. The thing that happens for that, which will prevent competition from fully adopting the model, is that the inventory does not sit in much. This gets inventory after the customer makes a purchase or gets it to the distribution point, but the company is not in the business of buying a trillion cars and putting them in a lot. This is a slimmer model. It contributes to gross margins, but also helps free up capital for technology, the types of acquisitions you mentioned, Vince. I think it’s very smart.
I also want to say that another impending advantage for the company is the stat you just mentioned – up to 16% of cars sold in the last quarter, obtained from other customers. This refers to the customer age model. That means that every time I need a new car, I stop going to anyone who has the best price, visiting various dealers. I am a customer who wants to buy and sell every car from one company. This is a long-term benefit if you consider that competitors such as CarMax have that inventory and all the land infrastructure associated with it. In the time needed by a larger competitor to adopt this model, Carvana can, for years, turn people into customers for life. That’s a very interesting proposition.
I think we will see additional small acquisitions from Carvana. One of the things on the balance sheet that shows that it might look in that direction is the recent issuance of $ 350 million from notecured notes. Now it has a little more weapons on the balance sheet, not only to patch some of the losses it produces, but also to make some small acquisitions. I think we will see more in terms of artificial intelligence.
As far as talent – that is, people who bring – because general and administrative costs are relatively lower than traditional used car companies – in other words, not having many sales people standing around creates a lot of overhead – he has more money to invest in great people, in engineers, data scientists, etc. This is something we have seen in the companies we talked about on the show. Analog, I would say, for Stitch Fix, which is also big at making acquisitions, not only companies, but also talent, people who can make the system more optimized to help you get your next purchase.
Shen: Final picking, when it comes to you, Asit, is this a stock? There is no stock? Or something that you put into the watchlist?
Sharma: This is actually a stock for me. But you must have a strong stomach, because the company does not have a net profit, per person. The next best metric that we often see is the sales price. I pulled it this morning, Carvana sold 3X sales a year into the future, which is actually not a sky-high valuation because prices against the sales ratio rose. But it’s more expensive. I will bring up CarMax again, which sells 0.5X sales going forward. Of course, it is a company that grows much slower.
If you buy this stock today, there is potential for correction, and we know the current general market is soft. However, if you yourself are a millennial or middle-aged person like me who wants to buy a big company and hold him for several years, I think it’s okay to start taking a position at Carvana. As I said, I think it has some structural advantages to fend off competition because it starts to adopt some better aspects of how Carvana operates.
How about you, Vince?
Shen: I am in the same boat as you. This is definitely a really cool company to explore, do the due diligence. I am very happy with what they built here, how it changes the consumer experience. I see many core metrics such as gross profit rising very fast and to the right. I see the potential for all markets that they can enter. This is clear, surely I will, as time goes on, add and create positions. Very excited for Carvana. Any final thoughts, Asit?
Sharma: Yes. If you have the opportunity, before you invest in a company, if you happen to be in a metropolitan area that has one of the vending machines, visit it as I do. This will give you a clearer sense of the type of benefits this company has. I think it might be just eye candy, but it creates a bond with the customer, when you sell your car and drive it from the parking lot, it’s different from just stepping in and smelling a new car, just seeing a shiny new vehicle. They are headed for something that will be instilled in younger people who want to stay with them for a long time.
Shen: Yes. To boil it, it reminds me of the final unboxing experience, which can really change the way you see a product. Very cool company. Glad we were able to talk about this, especially when I finished my time with Industrial Focus. Once again, thank you very much, Asit!
Sharma: Thank you, Vince!
Shen: Thank you, stupid, for tuning! The people in this program might have a company discussed at the event, and The Motley Fool might have official recommendations for or against each of the shares mentioned, so don’t buy or sell anything based solely on what you hear during the program. Stupid!
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