Rob Vinall on Carvana (CVNA) - Investment thesis and the acquisition of Adesa

TL;DR

Rob Vinall’s Carvana (CVNA) investment thesis rests on the large gap between its roughly 400,000 annual sales and the approximately 40 million used cars sold annually in the US. He argues that online penetration, then only 1%–2%, could eventually reach 10%, 20%, 30%, or more, while rapid inventory turnover limits exposure to price swings. Read on for his views on Adesa, EVs, consumer sentiment, and debt.

Transcript

so um i just have a question on carvana if you  could kind of actually it's kind of an industry   question so I'm looking at the uk car dealership  um industry and it's they've kind of increased   margins similar to the us a lot due to the supply  chain issues and it's kind of set to continue   so my first question would be what do you think  will ... Read More

Key Insights

• 🎴 The online penetration in the used car market is significantly lower compared to other industries, providing a vast growth potential for Carvana.
• 😨 Supply chain issues and disruptions in the new car market have led to increased margins and price volatility in the used car industry.
• 😌 Carvana's unique selling proposition lies in its hassle-free online experience, which appeals to customers seeking convenience and transparency.
• 😨 Carvana's investment potential is not heavily impacted by short-term economic fluctuations or disruptions in the used car market.
• 😒 Carvana's recent acquisition of Adesa will accelerate its footprint through the use of existing auction sites for building inspection and reconditioning centers.
• 🥹 Carvana's level of indebtedness is viewed as manageable, given the company's strong shareholder base and the nature of the assets against which the debt is held.
• 😨 Carvana chose a pure online strategy, recognizing the different cost structures and infrastructure requirements between online and offline car sales.

Questions & Answers

Q: What is Rob Vinall’s investment thesis for Carvana (CVNA)?

Vinall sees a long growth runway because only about 1%–2% of used-car sales were online, despite the convenience of browsing, buying, and arranging delivery without visiting a dealership. With roughly 40 million used cars sold annually in the US and Carvana selling around 400,000, he believes online penetration could eventually reach 10%, 20%, 30%, or more.

Q: Why does Carvana offer a better customer experience than traditional dealerships?

Customers can browse online, select a car, and buy it with a click instead of visiting a dealership, negotiating with a salesperson, or worrying about being overcharged. In the best-case scenario described by Vinall, the car can be delivered the next day.

Q: Could weak consumer sentiment undermine the Carvana investment thesis?

Vinall does not believe a long-term investment decision should be based on short-term swings in consumer sentiment. He expects any long-term business investment to experience both good and bad periods.

Q: How did new-car supply-chain problems affect the used-car market?

When COVID hit in March 2020, car companies canceled semiconductor orders as they expected new-car demand to collapse. The economy and car demand then recovered quickly while supply remained constrained, pushing some new-car buyers into used cars and raising used-car prices.

Q: How does Carvana manage volatility in used-car prices?

Carvana typically sells a purchased vehicle within about six weeks, limiting how long inventory is exposed to changing prices. Falling prices may temporarily reduce profit or cause a loss on some vehicles, but Carvana can then acquire replacement inventory at lower prices.

Q: Would falling used-car prices hurt Carvana?

Vinall expects only a short-term effect on vehicles already held in inventory when prices decline. He also argues that lower prices should stimulate demand and therefore could be positive for the broader used-car industry.

Q: How could electric vehicles affect Carvana and the used-car market?

Vinall expects a used-car market for EVs just as there is one for combustion-engine vehicles, so he does not expect the market’s size to change for that reason. Carvana’s ability to recondition vehicles also supports its position as vehicle powertrains change.

Q: How does the Adesa acquisition support Carvana’s strategy?

The acquisition gives Carvana access to existing Adesa auction sites. Carvana can use those locations to build inspection and reconditioning centers, accelerating the expansion of its operational footprint.

Summary & Key Takeaways

• Carvana is an online seller of used cars, providing a hassle-free experience without the need for dealerships or haggling with salespeople.

• The online penetration in the used car market is currently very low, presenting a significant growth opportunity for Carvana.

• Supply chain issues and disruptions from the new car market have resulted in increased margins and price volatility in the used car market.