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Tesla car stock

Why This Company Just Had Their Best Quarter Ever

industrials information technology investing strategies Aug 24, 2021

For the first time in Carvana's (CVNA) history, they are actually profitable! Growing much faster than anyone anticipated, we're extremely excited by their growth potential. But something is happening far beyond their income statement. What we're seeing is a monumental shift in the ways cars are both bought and sold. In the traditional model, cars were often bought in person and are now becoming one of the last sales channels to be brought online.

However, there has historically always been a large gap due to the purchase amount and the need to see the vehicle in person. Carvana's solution is hands down one of the best out there and is serving as the platform needed to remove this resistance. We therefore anticipate that Carvana will be able to generate revenue growth over many of their peers. And if successful, start potentially looking to jump into other similar verticals.

Let's jump into the details of this and what impact we believe this will have on the stock.

Earnings in Review:

  • The first impact of their platform is seen in their EPS beat. Carvana ended up delivering an EPS of $0.26 vs. the consensus estimates of $-0.37.

Let us first state how crazy this is. This was anticipated to happen in 2 years from now! The fact that this already occurred, speaks to the possibilities of their platform.

  • This was largely attributed to them generating sales figures that were (in theory) still quarters away. With the revenue beat and margins increasing significantly faster than anticipated, Carvana was able to beat expectations in a way that no one saw coming. Therefore we now anticipate CVNA to grow its market share from 1% to 7% by the end of the decade. With this increase in market share we anticipated CVNA to generate over $100B of revenue from used cars alone.

Carvana's Differentiators:

The reason they were able to do this is because Carvana does three things extremely well:

  • The first is that their platform offers a 3D image of a car that does 360' views of that car. In this view they show every single little issue that any car may have. You can then zoom in on those issues and see the specifics of any interior or exterior problem. They call this their 150 point inspection - this is something that no one else is doing to their level of granularity.
  • The second is their Carvana Certified program which only certifies cars that have next to no issues. On average only 1 out of 20 cars get approved for this inspection! The cars that do get approved end up going for significantly more value! Carvana said that they invest about 1k per vehicle on their platform and this creates inherent trust with their customers which creates a flywheel effect. They additionally recently rolled out a partner certification in order to expand their scale.
  • The last thing they do really well is offer easy car shipping. For anyone who has ever shipped a car, you know the process is beyond stressful. It is expensive, creates 0 inherent trust and you do not know if your car will be shipped until a few days out. Carvana gets rid of all of that in an instant by using their services to ship out the cars countrywide.

Carvana Implications:

The implications of this earnings beat and differentiated platform, leads to some serious growth opportunities for Carvana. 

This makes them one of our top picks in the marketplace sector!

When looking at this downstream growth we already see that the thesis is catching on.ed cars alone!

At a $62.3B valuation, the stock is far from cheap. But at our growth estimates of EBITDA of $250M by 2022 & $7.5B by 2030, we think the market is still under-discounting the upside capability of this company. We therefore are reiterating our overweight rating and are allocating additional investment to this company.

Price Target: $420

Target Date: 7-9 Months

Rating: Overweight

Ticker: CVNA