If you’ve tried to buy a new car this year, you likely had a difficult experience that potentially involved extensive delivery delays and even sky-high prices. The reason is a global shortage of advanced semiconductors, the critical computer chips that power…
the increasingly digital features in new vehicles.
This has pushed consumers into the used car market instead, but that has triggered soaring prices there, too. According to the latest inflation data, used vehicle prices have increased by more than 24% over the last 12 months, and overpaying for a used car can be financially irresponsible since they’ve historically depreciated in value.
But it hasn’t stopped consumers rushing to buy, with used-car sales specialists like Carvana (NYSE:CVNA) doing record business. It just delivered a bumper third-quarter result, and here are some of the key details.
Over 100,000 cars sold in Q3, again
Carvana isn’t a typical used car dealer. It doesn’t have enormous car lots where customers can roam around in search of a suitable vehicle; it instead takes a digital approach, selling online and delivering directly to the buyer. If the customer wants to trade in their existing vehicle, they can opt to have it picked up by the company or deliver it themselves to one of Carvana’s 29 vending machine locations.
Leveraging digital channels means the company can build a greater level of scale, transact more quickly, and use new tools to engage buyers. For example, it uses artificial intelligence and machine learning to monitor used car auction sales to determine what vehicles are most popular at a given time. Then, it aims to stock more of those vehicles to ensure it always carries the inventory consumers want.
The strategy has resulted in rapidly growing sales.
Carvana has now sold over 100,000 cars in each of the last two quarters, a remarkable feat considering it took the company five years to sell its 100,000th vehicle when it was getting started.
Rising car prices equal soaring revenue and gross profit
The company has undoubtedly benefited from the rush into the used car market. Holding inventory that is constantly appreciating in value means Carvana makes more money for almost no additional expense. Used car prices will eventually reach a top and begin falling as history suggests, but for now, the rewards continue to flow.
Gross profit growth over the last 12 months only tells part of the story. To put it in perspective, gross profit per unit was $206 in 2015, so the current figure represents 2,167% growth over the last six years. As Carvana sells more cars, it achieves scale, which means fixed costs become a smaller percentage of overall revenue, hence a higher gross margin — even discounting the current tailwinds.
Naturally, the combination of rising prices and record-high vehicle sales also means skyrocketing revenue. For the full year 2021, analysts expect Carvana will generate…
Continue reading at THE MOTLEY FOOL