Carvana (CVNA, Financial)’s recent acquisition could boost its financial prospects through the delivery of an enhanced customer experience. It is set to provide data to make purchasing suggestions based on past customer behavior in order to generate incremental sales.
Expansion into new regions and an investment in additional capacity may catalyze the company’s stock price. Similarly, purchasing vehicles from customers may offer a seamless buying and selling experience that encourages repeat business.
Although the company is loss-making, it is making progress in reducing customer acquisition costs and improving gross profit per unit. Having risen 170% in the last year versus a 4% gain for the S&P 500, it could have investment appeal.
Expansion
The recent acquisition of Propel AI has the potential to boost Carvana’s financial performance. Propel AI is an artificial intelligence (AI)-powered communication platform that delivers automated conversations with customers via online chat, SMS and email. It will utilize data to help the company to anticipate the secondary questions regarding a potential purchase that a buyer may have. It may then be able to suggest different options based on past customer behavior. This could lead to stronger engagement with consumers, as well as offer an improved customer experience and incremental sales from its user base.
Expansion into new locations could boost sales and profitability, with the company opening 30 new markets during the third quarter of the 2018 fiscal year. It now expects to open 40 new markets in fiscal 2018 to almost double its presence in the U.S. Its pace of expansion is continuing to increase, and it expects to reach 57% of the U.S. population by the end of 2018. This is up from 52% at the end of the second quarter of fiscal 2018. It expects to expand further, targeting the 200 markets in the U.S. that have populations of 200,000 people or more.
Growth potential
Previously, the company was focused on selling vehicles rather than buying them. This is quickly changing, with the number of vehicles purchased from consumers in the most recent quarter rising 273% compared to the same period of the prior year. This means that 16% of retailed vehicles are sourced from customers, which could create a more seamless buying experience for consumers seeking to trade in their vehicle for a newer model.
Carvana is investing in added capacity. For example, it has secured a site in Indianapolis that will become its fifth inspection and reconditioning center (IRC), with construction already underway. This will increase its capacity to inspect and recondition units by 50,000 vehicles per year so that it reaches 250,000. It will also reduce transportation time and costs when acquiring a vehicle, inspecting it and then redistributing it, thereby creating a more efficient business model.
Industry potential
Although Carvana recorded revenue growth of 137% in the most recent quarter, it remains a loss-making business. Its bottom-line loss widened during the third quarter, partly as a result of the large-scale investment being made in capacity and expansion into new markets. Further losses are likely as it seeks to expand both its reach and capacity. It may also lack a competitive advantage in what is a highly fragmented used-vehicle market, where buying a vehicle online may not yet be the status quo.
The company, though, has made progress in improving its gross profit per unit in the last few years, while reducing its customer acquisition cost. It has also been able to reduce vehicle turnaround time while increasing total inventory as it seeks to transition towards a business that focuses on developing customer loyalty. A seamless customer experience that offers convenience may encourage consumers to become less focused on price – especially as the idea of buying a car online becomes more normalized.
Outlook
The recent acquisition of Propel AI could enhance Carvana’s customer offering and deliver incremental sales. Its investment in expansion in order to cover a greater proportion of the U.S. population could catalyze its sales growth. Increasing capacity may reduce transportation costs and improve efficiency, while a seamless buying and selling experience could deliver improved customer loyalty.
While the business is likely to remain loss-making in the short run, it continues to improve in areas such as gross profit per unit. It may also benefit from a normalization of buying vehicles online, which could provide it with a competitive advantage versus established offline peers. Having significantly outperformed the S&P 500 in the last year, it could offer further capital growth potential.
