Carvana’s (NYSE:CVNA) unique, best-in-class online platform and customer experience put it in a strong position to capture more share within the large, highly fragmented used-car segment.
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That is the opinion of UBS analyst Joseph Spak, who has been assessing the used car retailer’s prospects.
Spak reckons that Carvana represents only about 1.5% of total used-vehicle sales (around 3% of the used retail market) but believes this could rise to roughly 4% by the end of the decade and close to 8% over the next 10 years as the company works toward its 3 million used-vehicle goal.
Assuming the total used market is roughly 40 million vehicles a year and retail used vehicles make up about 53% of that, or around 21 million units, then 3 million units would represent about 14% retail share. “So while a 3mm unit target looks aggressive, it is further out and we believe CVNA has positive secular tailwinds, a leading platform and a culture focused on growth that could get them towards their goal,” Spak said on the matter.
The growth will be supported by several factors. First, consumers are steadily shifting toward online purchases, which currently make up just 2% of used-vehicle sales. Second, Spak points to UBS Evidence Lab data that shows Carvana’s strong e-commerce platform is “further differentiating” its advantage over its largest competitor, offering shoppers a better overall experience and often a better price. The company remains highly focused on customer experience, including same-day or next-day delivery, which should help strengthen brand recognition. Third, as more customers use the platform, Carvana’s vehicle acquisition efforts improve, and greater vehicle availability can support additional retail sales.
Furthermore, Spak believes the profitable growth “appears sustainable.” Carvana has “industry leading” retail gross profit per unit (GPU), roughly twice the industry average, and the company is expanding at a much faster pace. Spak expects it to further increase GPU as it gains efficiencies and realizes savings from its investments in inspection and reconditioning centers and from the ongoing integration of ADESA auction sites. These steps should not only provide enough capacity to reach its roughly 3-million-unit target within 5–10 years but also support higher GPUs over time.
“CVNA is a unique company, not a pure auto retail company but not a pure internet marketplace company,” Spak summed up. As such, Spak applies a 29x 2027 EV/EBITDA multiple, which is higher than most auto retail peers but closer to faster-growing internet companies. That, says the analyst, is justified given Carvana’s stronger growth profile.
Bottom line, Spak initiated coverage of CVNA stock with a Buy rating and $450 price target, implying the shares will post growth of 20% in the months ahead. (To watch Spak’s track record, click here)
15 other analysts join Spak on in the bull camp, and with an additional 3 Holds, the analyst consensus rates the stock a Strong Buy. At $432.67, the average target implies shares will climb 15.5% higher over the one-year timeframe. (See Carvana stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.