Carvana Is a Great Business (But a Terrible Investment)
I’ll never buy a car from any business aside from Carvana (CVNA) – Get Carvana Co. Class A Report ever again. That’s how my wife and I have purchased our last three cars and it’s a delightful experience. In all three cases, we paid less money than we would have anywhere else, got a car in excellent condition, and experienced a simple delivery (even during the height of the pandemic.
Carvana makes getting financing painless, offers a fair price for your trade-in, and basically makes the usually terrible process of buying a car much better. The company saw something that was broken (car buying from dealers and lots) and disrupted it.
That makes me a loyal customer, but it does not make the company a good investment. In fact, Carvana falls into a broad category of companies that have a good business but are not likely to be one you want to own shares of.
Why Is Carvana a Bad Investment?
Carvana looked at the car-buying process and found the pain points. Consumers want clear pricing, not “let me talk to my manager” and extra fees for undercoating mixed with shady calculations based on how much of a monthly payment someone is willing to pay.
The online car retailer took all the pain out of the process and likely won its share of loyal customers like me. Unfortunately, I only buy one car every five years or so. To build its business, Carvana needs a lot of customers and that’s expensive. It requires a significant marketing spend to lure in a new customer and even delivering good value along with a positive experience does not guarantee loyalty.
Essentially, Carvana has no moat because it showed the auto industry what it was doing wrong. Now, it not only has to deal with copycat competitors like Vroom (VRM) – Get Vroom, Inc. Report, which basically stole its business model to regular car dealers becoming smarter about how they do digital sales.
Carvana’s only moat is that it’s expensive to buy a bunch of cars and process them. The problem is that a number of companies already do that and Carvana has shown them how to be better at doing it.
And, while I am loyal to Carvana, car buying is a dollar sensitive business. Will the company lose sales because a rival is willing to go a few dollars cheaper? Almost certainly.
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This is a great company to do business with and it might someday make money (though it lost $506 million in the first quarter and does not expect to be profitable this year or probably next). And even if Carvana does reach profitability, it’s working in a highly competitive market where its “we’re different than everyone else” advantage gets smaller every day.
Carvana, it should be noted, has a rosier view of its business outlook, which it shared in a letter to shareholders:
The sales results of other used vehicle dealers suggest Carvana is gaining meaningful market share in a difficult industry environment, despite operational constraints. In general, we believe the used vehicle market is a stable market that will average 40 million or more annual unit sales over time. We believe the factors currently impacting used vehicle industry sales are transitory, and we are well positioned to take advantage when the industry rebounds.
Our confidence in our growth trajectory is bolstered by the strong growth trends we are seeing in parts of the business that are less impacted by used vehicle affordability. Retail units sold to Carvana finance platform customers with a FICO score greater than 700 increased by ~50% YoY in Q1, despite the aforementioned industry headwinds and operational constraints.
Investing Isn’t Just About Having a Good Product
When you evaluate whether you should own shares of a company the product or service does matter. But that’s one factor among many. A new coffee company may have a cold brew that makes drinking Starbucks (SBUX) – Get Starbucks Corporation Report seem like drinking fetid pond water, but there’s a lot more to the coffee business than just making an excellent cup of Joe.
Starbucks marketed a better coffee experience (at first) and then it hit scale. If its rivals had adopted the European cafe model sooner or did a better job of learning from what made the chain successful, then it’s possible the coffee giant would never have grown beyond a niche player.
Think of Carvana as a digital streaming cable provider like fuboTV (FUBO) – Get fuboTV Inc. Report. That company can build some audience by offering better pricing and more choice than traditional cable providers. It can’t make much money doing that and big cable — an industry that still acts like it has a monopoly — can pick and choose which products or offers to copy.
Fubo, like Carvana, has nothing proprietary (at least in its core streaming cable business) so the established players might lose a little share, but they can adjust their tactics to be more like the company disrupting the industry. When you fight huge powerful incumbents you better knock them off quickly. If you don’t, your actions basically serve as R&D for the well-heeled establishment.
Daniel Kline is Managing Editor of TheStreet.com.