Carvana posted a 25% rise in vehicles sold for the second quarter, when many dealerships were closed by the pandemic.
Photo: Patrick T. Fallon/Bloomberg NewsCarvana Co., CVNA -13.90% an online-only seller of used vehicles, is generating new interest from both car buyers and Wall Street as its business benefits from the burst in internet shopping.
Carvana’s recent success comes at a critical moment for the eight-year-old company, which was founded with the mission of changing the way people buy cars but has yet to turn a profit and is fending off tougher competition in the online-retailing space.
The Tempe, Ariz., company last week posted a 25% increase in vehicles sold for the second quarter, a time when many dealerships were still closed because of the Covid-19 pandemic. Total revenue grew 13% to $1.12 billion for the April-to-June period.
“What we needed was an event that would generate the willingness to try something new,” Chief Executive Ernie Garcia said. “That may be happening now faster than it ever has.”
But the used-car retailer is still losing money as it invests heavily in its own operations in an effort to grow its U.S. market share, and analysts polled by FactSet don’t expect it to be profitable on a net basis until 2023. Challenges related to reconditioning used vehicles for sale also have weighed on results. For the April-to-June quarter, the company reported a loss of $160 million.
Still, Carvana’s latest results beat Wall Street’s expectations, and the company’s stock rose 28% the day after the quarterly report, closing at $222.99. Shares have since retreated to $192, as of Friday’s close, but remain double where they started the year.
Carvana, known for its tall, glass towers that dispense vehicles purchased by customers, was built with the intent of giving car buyers an alternative to going to a dealership. Shoppers can browse and purchase preowned models through the company’s website, and then arrange for the purchase to be delivered by truck to their home or office.
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Carvana promotes a seven-day return policy to ease concerns about buying a car sight-unseen.
Used vehicles—unlike those sold new—aren’t required to be sold through a franchise dealership network, allowing Cavana and rivals Vroom Inc. and Shift Technologies Inc. to operate without bricks-and-mortar storefronts.
Growing demand for used vehicles has helped lift business for Carvana and its rivals, especially with inventory still tight on the new-car lot because of virus-related factory constraints.
Carvana has steadily increased sales in the past three years and expanded into more than 260 markets in the U.S. The used-car retailer expects to sell up to 265,000 cars in 2020, a nearly 50% increase over 2019.
As more businesses moved online to capture the surge in shopping traffic, traditional dealerships also have scrambled to make the shift to internet retailing, building out their websites with more capabilities and investing in delivery personnel.
Carvana’s stock price has more than quadrupled since late March when lockdowns began proliferating across the U.S.
Photo: Patrick T. Fallon/Bloomberg NewsDealership chain AutoNation Inc., for instance, has moved aggressively to shift its operations online, promoting a new store-to-door delivery service that allows customers to skip the showroom. It is starting to trim positions in the physical showroom, as a result.
A few years ago, Carvana and other used-car retailers like CarMax Inc. presented a wake-up call for traditional auto dealers, said Rhett Ricart, chairman of the National Automobile Dealers Association and a Ford dealer in Columbus, Ohio. But dealers have since adjusted and now have many of the same tools, he said.
“That’s been accelerated by Covid-19,” Mr. Ricart said. “Other entrants might have had it easy before, but now new-car dealers are going to be a very formidable adversary in the used-car market.”
Investors, meanwhile, are increasingly placing their bets on the upstarts. Carvana’s stock price has more than quadrupled since late March when lockdowns began proliferating across the U.S.
Competitor Vroom Inc. went public in June in an effort to challenge Carvana and take advantage of investor enthusiasm for online-car retailing.
In the stock’s first day of trading, Vroom’s shares more than doubled and have remained elevated, closing at $63.97 a share Friday, nearly triple the $22 IPO price. Vroom’s market value is $7.3 billion, below Carvana’s nearly $33 billion market capitalization.
Shift Technologies, a San Francisco-based startup with a similar internet-only model, is looking at a public offering.
Carvana is working through its own growing pains, though.
Compared with more-established used-car retailers, Carvana has to spend more on advertising and marketing to grow its brand recognition. It also is working to build out its network of so-called reconditioning centers—places where it cleans and fixes cars to get them ready for sale—to speed up its turnover of used-car stock.
On top of that, many of its existing centers were closed temporarily this spring as part of the lockdowns.
“The fact that Carvana is multiple years ahead of the competition on this front certainly helps,” said Zack Fadem, an analyst for Wells Fargo & Co. But it is still building its operations, and that can take time, he added.
Carvana has set a goal of eventually selling more than two million vehicles annually through its online retailing network.
“If Carvana can achieve a certain level of scale, they can be very profitable,” Mr. Fadem said.
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