Should You Avoid – or Buy Carvana Stock?

Should You Avoid – or Buy Carvana Stock?


Vincent Shen: There were some interesting
comments from CEO Garcia about competition. He said, basically, given the large size of
the market, this fragmentation among the competition, even if there are new companies to enter this
more e-commerce-focused model for selling cars, it’ll basically serve to normalize the
concept or the idea of buying a car online. For some people, it still seems intimidating
to not be able to see or handle or even test-drive a car that your purchasing,
thousands of dollars. Overall, as that becomes normalized,
even if there’s some competition, that’s something that’s likely to lift the whole segment before
becoming a more traditional fight for market share. Last couple things that I will mention,
used car selling is the main business driver for Carvana, but it’s also experimenting with
sourcing more of its inventory from customers. The number of vehicles that they will purchase
directly from their customers grew over 270% year over year in the third quarter. It made up about 16% of the units
the company sold via its retail channel. Something I wanted to get your opinion on, Asit,
is all the acquisitions that the company has made in the past few years. I know that they’re very focused on acquiring
certain talent, certain capabilities that support this platform that they’ve created.
What are your thoughts there? Asit Sharma: The company is now
shifting its focus towards technology. The last acquisition was the purchase of an
artificial intelligence company, which will help facilitate more interaction on the site,
and also interaction via SMS. Carvana is pretty tech-savvy to begin with,
but utilizing the data that they have, they want to be able to anticipate the secondary
questions a buyer might have, and be able to resolve those quickly, as well as know
the buyer a little better from its data sets and suggest different options. Again,
financing is one, if you think back to the GPU. I think that’s a smart move. At some point, the company has to
build out some competitive advantages. The thing that it’s got going for it,
which is going to prevent competition from totally adopting its model, is its
inventory doesn’t sit on lots. It gets inventory after a customer makes the
purchase or it gets it to the distribution point, but the company isn’t in the business
of buying a gazillion cars and putting those on lots. It’s a more streamlined model. That contributes to the gross margin,
but it also helps free up capital for the technology, these types of acquisitions that
you’re mentioning, Vince. I think that’s very smart. I also wanted to say that another inherent
advantage going forward for the company is a stat that you just mentioned — up to 16%
of the cars that were sold in the last quarter, it acquired from other customers.
This is pointing to a customer lifetime value model. It means that every time I need a new car,
I stop going to whoever has the best price, visiting different dealerships. I become this customer who wants
to buy and sell every car from one company. This is a long-term advantage if you consider
that a competitor like CarMax has that inventory and all the land
infrastructure that’s tied to that. In the time it would take a larger competitor
to adopt this model, Carvana can, over the years, convert people to lifetime customers.
That’s a very exciting proposition. I think we’ll see additional
small acquisitions from Carvana. One of the things on the balance sheet that
indicates that it probably is looking in that direction is the issuance of $350 million
of unsecured notes just recently. It now has a little more firepower on its
balance sheet, not only to patch up some of the losses it’s generating,
but also make a few small acquisitions. I do think we’ll see more
in terms of artificial intelligence. As far as the talent — that is, the people
that it’s bringing on — because the general and administrative expense is relatively lower
versus traditional used car companies — in other words, it doesn’t have a lot of sales
people standing around lots creating overhead — it has more money to invest in great people,
in engineers, data scientists, etc. This is something we’ve seen in companies
that we’ve talked about on the show. Analogous, I would say, to Stitch Fix,
which is also big on making acquisitions, not just of companies, but of talent, of people who
can make the systems more optimized to helping you get to that next purchase. Shen: Final take, when it comes down to it for you,
Asit, is this a yes stock? A no stock? Or something that you’re putting on the watchlist?
Sharma: This is actually a yes stock for me. But you have to have a bit of a strong stomach,
because the company doesn’t have net income, per say. The next-best metric that
we often look at is price to sales. I pulled that up this morning, Carvana is
selling at 3X forward one-year sales, which actually isn’t a sky-high valuation as
price to sales ratios go. But it is a lot pricier. I’ll bring up CarMax again,
which trades that 0.5X forward sales. Of course, that’s a much
more slowly-growing company. If you purchase this stock today, there’s
potential for a correction, and we know the general market right now is soft. However, if you are yourself a millennial
or middle-aged person like me who wants to buy a great company and hold it for several years,
I think it’s okay to start taking a position in Carvana. As I said, I do think it has some structural
advantages to fend off competition as it begins to adopt some of the better aspects
of how Carvana operates. What about you, Vince?
Shen: I’m in the same boat as you. This is definitely a company that has been
really cool to dig into, do that due diligence. I’m really excited about what they’re building
here, how that’s changing the consumer experience. I’m seeing a lot of these core metrics like
gross profit go very quickly up and to the right. I’m seeing the potential for
all these markets that they can enter. This is definitely, definitely one that I will be,
over time, adding and creating a position. Very excited for Carvana.
Any final thoughts, Asit? Sharma: Yes. If you have a chance, before you invest in
the company, if you happen to be in a metropolitan area that has one of the
Vending Machines, go visit it like I did. It will give you a clearer sense of the kinds
of advantages that this company has. I thought it was probably just eye candy,
but it creates a bond with the customer, when you vend your car and drive it off the lot,
that’s different than just stepping in and smelling the new car smell,
just seeing the shiny new vehicle. They’re onto something which is going to implant
in younger people this desire to stick with them for a long time.
Shen: Yeah. To boil it down, it reminds me of the ultimate
unboxing experience, which can really change how you perceive a product.
A very cool company. Glad we’re able to talk about this,
especially as I wrap up my time with Industry Focus.

About the Author: Michael Flood

3 Comments

  1. From a consumer point of view I really enjoyed my buying experience without dealing with a sales person. I didn't mind haggling and beating down prices on car lots but that takes all day if not several trips back and forth. The price I paid with carvana is fixed but it was below fair market in my area. Also there referral system is smart. I got one 500 off on purchase and the customer that referred me gets a check for 100 dollars…up to ten times. I do think this platform is the future and I myself will invest with them.

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