Carvana sees enormous upside for used-car market

SAN FRANCISCO — In its mere six years of existence, Carvana has grown at a fantastic clip. But the online used-vehicle upstart aims to be exponentially bigger.

"We believe that we can sell 2 million cars per year," CEO Ernie Garcia said Jan. 24 at the Automotive News Retail Forum: NADA here.

To put that in perspective, the company expects the number of vehicles sold in 2018 to be just under 100,000. It is yet to be determined when the 2 million mark could be reached. The key to getting there for Carvana — or any retailer who wants a larger piece of the fragmented used-vehicle pie — may be wooing people to want to switch vehicles more often. That can be done by reducing prices and generally making the buying experience less cumbersome, Garcia said.

"If it wasn't such a pain [to buy a vehicle], they'd do it faster, and the industry would grow," Garcia said.

Consumers currently purchase about 40 million used vehicles annually with an average of 6.75 years between transactions. Garcia says that annual sales number could jump to 90 million transactions a year if shoppers updated their used vehicles every three years on average. Even a slightly speedier turn than today's — every six years — would translate to 45 million in sales, a 12.5 percent jump.

But even without vastly expanding the market, a study of other retail markets suggests much room for growth — and not just for Carvana, Garcia said.

"The natural analogy in automotive retail is to say let's look at the biggest players," Garcia said. CarMax leads all used-vehicle retailers with about a 2 percent market share. That means the largest players in automotive retail hold a "way smaller share" than the largest players' shares in other retail industries, he said.

According to a presentation Carvana gave to investors in November, Walmart, for example, has a 54 percent share of the general-merchandise store market. Best Buy claims 40 percent of the electronics and appliance store market. And Home Depot commands a 28 percent share of the building materials and supplies retail market.

If automotive retail behaved similarly to these markets, it should have a player with about a 31 percent market share, Garcia said. That means in a market in which 40 million vehicles are sold annually, the top player would sell 12 million units. The second-, third- and fourth-largest players would sell 7 million, 3 million and 2 million vehicles, respectively.

"So that suggests there's room for much, much larger players," Garcia said.

It also helps explain why Carvana thinks it can move 2 million cars and trucks a year. "It's a goal we're going to chase for a while, but it's something we think we can do," he said.

Carvana has reported triple-digit revenue and unit volume growth in recent quarters — it is now operating in more than 80 markets. The company is still not making money, but "we don't think it's far away," Garcia said.

"We think we're going to reach profitability way before" hitting 2 million in annual vehicle sales, he said. He declined to specify a timeline for achieving either milestone.

Sameet Sinha, a senior equity analyst who covers Carvana for B. Riley FBR, said growing to 2 million units will indeed be a long chase. He called it a "hypothetical goal" and noted that Carvana has not assigned a timeframe to it. "Even 10 years, it seems, it would be tough to get there," Sinha said.

The used-vehicle market is incredibly fragmented, but Sinha said that, all things constant, the growth needs to come from somewhere. "There's only so much open territory [in which] you can take share from regular dealerships," he said.

And the used-vehicle market is also different from many others. Most markets are defined by production and consumption, Garcia noted. Groceries, for example, are bought, consumed and then they're gone. In the used-car market, customers use cars instead of consuming them. Used-vehicle sales are dependent on how often people buy.

Steve Dyer, co-president of Craig-Hallum, said that out of the market's 40 million annual used-vehicle sales, selling 1 or 2 million does not seem like an impossible goal for Carvana. "To me the question is, can they do it profitably?" Dyer said. Carvana has not reported a net profit since going public in April 2017. Full-year 2018 results are set to be announced Feb. 27.

"The people that own the stock right now are obviously investing in growth," Dyer said.

Investors largely expect Carvana to continue to lose money in 2019.

"But to me they have to make a considerable move toward profitability in the next year," Dyer said.