Online used-car retailer Carvana continues to report losses, but investors who are bullish on the company concur with its CEO: There is still much room to grow.
As an example of that room, Carvana CEO Ernie Garcia noted last week after Carvana reported first-quarter earnings that the company has just a 0.35 percent share of the U.S. used-vehicle market.
"That means only about one in 300 customers who bought used cars in the U.S. in the first quarter bought it from us," Garcia told analysts on a conference call.
And many of those 299 customers who didn't buy from Carvana don't know about the company. Building awareness of Carvana as a used-vehicle shopping option will help drive the retailer's expansion, Garcia pointed out.
In Atlanta, where the company has focused on increasing market penetration, Carvana has about 7 percent "unaided awareness." That means, Garcia said, that only about one in 14 people in the Atlanta metro area, the most mature of Carvana's markets, was able to name the online retailer when asked to list places they could buy a car.
This belies the company's rapid growth.
Carvana revenue soared in the first three months of 2019, more than doubling to $755.2 million. Retail vehicle sales nearly doubled to 36,766. It operated in 124 markets as of May 8 and expected to open in up to 60 more this year, adding places adjacent to and smaller than the larger metro areas where it started.
But Carvana's net loss widened substantially to $82.6 million in the first quarter. The company has yet to report a profit since going public in April 2017. So, even with rapid growth, how much longer can investors stomach such steep losses?
"That's the biggest debate going around right now," said Sameet Sinha, an analyst with B. Riley FBR.
Sinha, whose firm has a "buy" rating on the stock, said he remains patient but with a caveat. He estimates Carvana will need a $200 million capital raise in the third quarter to support operations. While Carvana may not be profitable by the back half of the year, losses should narrow significantly, he said. He concurs with Carvana execs that there is much room for growth given relatively low market awareness of Carvana.
So long as the company can continue to expand, bullish investors will show patience, he said. "Ultimately it's a scale game," Sinha said.
Analysts with Morgan Stanley seem less enthusiastic, citing concerns about cost and cash flow in an investor note. While the firm has an "underweight" rating, the equivalent of a sell rating, on Carvana, it remains "constructive" on Carvana's ability to disrupt the used-car dealership model.
But "we believe that it will take longer for this business to scale than the Bulls think," Morgan Stanley analyst Armintas Sinkevicius wrote, "and we are concerned about profitability in the meantime."