Few people look forward to the process of buying a used car. Carvana (CVNA 3.65%) purports to upend the traditional used car lot experience and make it enjoyable.
Carvana, an online-only used car dealer, gives customers the opportunity to shop, finance, and sell or trade in cars from the comfort of their own home. There's even an option for home delivery of the chosen car, and a seven-day return policy if you decide you don't like it.
The idea is that cutting out the middleman, dealerships, saves a lot of money, resulting in lower prices for the consumer. Customers can browse the inventory of 15,000 used cars on the company's website and take possession of their selected car within a couple of days.
Based in Arizona, Carvana has expanded to serve 149 markets across the country. Regulatory approval at the state level can be onerous -- most traditional car dealerships fight against online car dealing -- but Carvana plans to continue expansion in 2020.
Image source: Getty Images.
Third-quarter earnings raise eyebrows
Carvana posted quarterly earnings data on Wednesday, Nov. 6th. The company beat on the top line, but missed on the bottom line. Revenue has grown, but expenses have escalated significantly as well. Meanwhile the stock price has been heading ever upward.
Revenues for the quarter came in at almost $1.1 billion, beating estimates for $1.01 billion.
However, other news wasn't so good. Comparable-quarter losses more than doubled from $17 million to $39 million. On a per-share basis, the adjusted loss per share was $0.56 versus a loss of $0.40 in the third quarter last year. That's especially worrisome considering the share count rose almost 7% over the past year.
Over the first nine months of 2019, Carvana more than doubled revenues to $2.47 billion -- but keep reading. The net loss has soared from $33 million a year ago to more than $94 million year over year.
Increased interest expense continues to have a huge impact on losses. Funding operations has meant taking on more debt, which means more interest expense. Interest expense alone rose 3.5 times in the third quarter from the year-ago period.
If it were easy, everyone would be doing it
Carvana's closest competitor is CarMax (KMX -1.47%), which has a slightly different business model. CarMax customers identify potential car purchases online, but routinely take cars for a test drive from physical CarMax locations before completing the transaction. In Carvana's vision, customers are happy to trade the test-drive experience for a lower price and seven-day return policy.
Carvana buys used cars and is trying to increase use of these cars as inventory, thereby decreasing acquisition costs. But cars depreciate quickly and the company could be stuck with a lot of bad inventory if the economy slows and demand dries up.
The company also finances car purchases. In my mind the jury is still out on Carvana's execution success in this area. Carvana could easily be saddled with a lot of bad loans if economic conditions deteriorate.
Should investors jump on for the ride?
Carvana's stock price has soared from $29.75 to $84.00 in one year. That's a huge run-up in a short time. The business concept holds interesting potential, but the stock price has gotten ahead of itself.
While I admire the expansion focus of management, I have a lot of concerns over the growing financial risks it is taking. It will take several quarters to see in which direction these risks take the company. I think investors should bypass this stock in favor of less risky companies until revenues increase faster than debt loads.
