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In the midst of the Holiday season, our normal glee and excitement appear blistered. As the flu season approaches, the coronavirus pandemic has raged on, with cases steadily increasing since September. The new degree of normalcy seems to be settling into a constant or never-ending cloud of uncertainty. This has undoubtedly put stress on the economy, and, more specifically, retailers throughout 2020. However, one savior to the retail space can be attributed to “e-commerce.” E-commerce retailers and the inevitable shift to online platforms have proven to buffer the social distancing and underlying fear caused by the pandemic. E-commerce provided a far-reaching platform for retailers and a convenient shopping experience for customers or a “win-win” situation. Companies like Amazon, Target, Walmart, Nike, Lululemon, and many others have maintained solid sales numbers throughout the pandemic buoyed by their online retail platforms. Despite the success seen from traditional retailers (i.e., clothes, food, accessories, etc.), other retailers have also become a byproduct of the online shopping craze of 2020. One example is the online used car retailer Carvana Co.
Carvana Co., together with its subsidiaries, operates an e-commerce platform for buying and selling used cars in the United States. Its cutting edge platform allows customers to research and identify a potential vehicle, inspect it using the company’s proprietary 360-degree vehicle imaging technology, purchase the vehicle, obtain financing and warranty coverage upon purchase, and schedule contactless delivery or in-person pick-up, all from the customer’s desktop or mobile device. Collectively, Carvana Co. is a consumer cyclical focused on the internet retail industry. Carvana Co. was founded in 2012, is headquartered in Tempe, Arizona, and has approximately 7,324 full-time employees.
Concerns about shallow valuations for online used-vehicle retailers like Carvana appear misplaced. Digital deals could likely become the norm with companies (like Carvana) taking a share and possibly expanding the $160 billion market. The customer and retailer ease of a one-stop business model could propel online-only used-vehicle dealers’ market share past full-line dealer groups by 2025 while driving the expansion of the pre-owned market. The shift away from traditionally used car dealers to online used car dealers is noteworthy. Carvana blew past traditional dealers AutoNation and Penske in used vehicle sales volume in 2020, aided by online-only transactions, social distancing, and the cumbersome pandemic that shifted customer’s shopping behaviors across the board.
Due to the behavioral shift of retail customers, larger auto groups have added e-commerce capabilities. However, these auto groups remain plagued with less nimble process updates and can be viewed as an attempt to distract focus from their biggest revenue contributors, new vehicles. U.S. auto dealer new vehicle sales have the potential to stall at $45 billion in 2021; meanwhile, pre-owned vehicle sales could continue to climb by $6 billion if the 11% a year growth rate since 2016 persists. This growth rate of used vehicles offers gross profit 2x that (and widening) of new vehicle sales as seen below:
Additionally, the year 2020 had some indirect effects on the auto industry rooted in new vehicles’ oversupply. Since the onset of the coronavirus, corporate layoffs, employee furloughs, lower excess capital, conservative spending behaviors, lower relative consumer confidence, and higher dependence on unemployment/government programs became the norm. This economic pullback depressed retail companies nationwide amid less customer spending, regional lockdowns, and social distancing mandates. Therefore, the unexpected onset of economic uncertainty resulted in sudden weaker demand in new vehicle purchases, causing an oversupply. As a result, car retailers used approximately $100 billion in cash incentives and discounts to manage the oversupply of new vehicles. However, this may not be enough to pass through to customers in 2021, motivating shoppers to find value in the expanding pre-owned car market (helping companies like Carvana). With the economic uncertainty continuing, price-sensitive customers will be attracted to the used car market, evident in the higher relative total gross profit from the segment. Therefore, accommodative thematic developments, growth-oriented business segment (used-vehicles), positive correlation to customer behavioral shifts, and e-commerce business platform support Carvana’s organic growth trajectory.
With this said, Holiday seasonality could also have an indirect positive effect on Carvana. With the pandemic uncertainty, still looming e-commerce retailers are set to boost Holiday sales and the overall retail sales segment. For instance, Adobe Analytics projects that record high online sales of more than $189 billion or a 33% increase is likely in 2020 (and could be even more as these projections are historically conservative). With approximately $9 billion spent on Black Friday, Cyber Monday topped nearly $11 billion in sales, becoming one of U.S. history’s biggest shopping days. Holiday season discounts will likely continue into December, increasing online retail sales through the end of the year.
Breaking it down further, e-commerce sales have grown substantially compared to the rest of the retail industry. Consumers shopping online increased from 28% to 36% so far in 2020. Despite total retail sales poised to decline by 10.5% in 2020, e-commerce is expected to jump approximately 18%. With this said, global shoppers drove a 75% growth rate in digital e-commerce in Q2 2020 over Q2 2019, outperforming the holiday shopping season of 2019, which was considered at the time to be one of the best in recent history.
Therefore, companies rooted in e-commerce platforms will likely benefit from an increased behavioral shift to online shopping. Carvana’s vertically integrated, online platform for selling used vehicles (a growing segment in the auto space) provides a seamless customer experience amid continued uncertainty. Furthermore, 90-day no loan payment promotion, contactless delivery service, seven-day money-back guarantee, and next-day delivery has not only eased concerns about buying large ticket items online, but it has positioned Carvana to boost sales amid the Covid-19 pandemic.
The year 2020 has significantly impacted our economy, especially the retail industry. However, it has also created opportunities that meet the rapidly changing and potentially lingering effects on consumers’ shopping patterns and day-to-day behavioral spending habits. E-commerce companies are one segment that has benefitted from a unique 2020. Within e-commerce, there have been many obvious winners like Amazon, Sea Limited, etc. However, companies like Carvana have been an e-commerce winner floating slightly under the radar. The compound annual growth rate of 66.2% between 2017 to 2019, rising gross profit per unit, and market-leading used vehicle units sold remain positive indicators.
In summary, some of the positive indicators for Carvana to rapidly expand market share and organically grow over the next few years from both an equity and fixed income perspective are:
- Robust demand of used vehicles
- Higher used vehicle total gross profits
- Accommodative thematic environment
- Larger dependence on online shopping
- Accommodative customer experience
- Capital and labor-light business model
- Noteworthy marketing trademarks (car vending machine)
- Attractive customer incentives
