Carvana’s revenue, retail sales milestones please investors

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Online used-vehicle retailer Carvana Co. continues to pile up losses as it carries out a rapid expansion strategy, but bullish investors still like what they are seeing.

The positives that emerged from Carvana’s second-quarter earnings reported last week include continued spikes in revenue and retail vehicle sales, a key metric that showed narrowing losses for the first time and a huge improvement in the retailer’s gross profit per vehicle.

Carvana’s gross profit per vehicle rose 46 percent to $3,175 in the second quarter, passing a goal of $3,000 that the company set two years ago.

“After the second quarter, people are realizing that Carvana sets out to do something and they are, in fact, tracking to what they said,” B. Riley FBR analyst Lee Krowl told Automotive News. “This kind of validation is important, especially when you’re in a newer business model where there’s not a lot of benchmarks.”

Krowl’s firm has a “buy” rating on the stock. Carvana’s share price rose 35 percent in the two days after earnings were released late Wednesday, Aug. 7, closing at $78.11 Friday, Aug. 9.

Carvana CEO Ernie Garcia touted last week that “just a six-year-old company” has swiftly built a model that is starting to pay significant visible dividends. For the first time, Carvana had a decrease in its year-over-year dollar losses on an earnings before interest, taxes, depreciation and amortization basis. The gross profit per vehicle and EBITDA figures were adjusted to exclude the effect of an employee stock gift program announced last year.

Garcia also noted that the ratio of vehicles purchased from private sellers for its inventory compared with the number of vehicles sold to customers increased from 24 percent five quarters ago to 52 percent in the second quarter.

“We are now buying as many cars from our customers, as we were selling just one year ago,” Garcia said. “The contribution of these efforts to our total [gross profit per vehicle] has been significant as well and played a major part in hitting our midterm target this quarter.”

Carvana plans to focus its marketing budget on buying vehicles from customers to support its gains on per-vehicle profitability, Garcia said. That includes investments in advertising, technology and operations.

Buying more vehicles from customers is a significant step toward achieving Carvana’s long-term goals, Garcia said.

During the quarter, Carvana’s net losses widened 25 percent to $64.1 million, but revenue more than doubled to $986.2 million. The company has yet to report a profit since going public in April 2017.

Retail vehicle sales nearly doubled to 44,000. Carvana expanded to 28 more markets and was in 137 at the end of June.

Other analysts remain concerned about the company’s cash burn.

Morgan Stanley analyst Armintas Sinkevicius noted in a report that breaking the $3,000 gross profit per vehicle barrier goes against the “bear case.”

But Morgan Stanley estimates that Carvana will use $336 million of cash in 2019 and $617 million of cash in 2020. Morgan Stanley raised its stock price target for Carvana from $22 to $30.

While Sinkevicius said he remained “constructive” on Carvana’s ability to disrupt the used-vehicle dealership model, it likely will take longer for the company to get the business to scale than bullish investors think.

“We are concerned about profitability in the meantime,” Sinkevicius wrote.

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