CarvanaCo. NYSE: CVNA Recommendation: BUY Analyst: …

[Pages:18]Carvana Co. NYSE: CVNA Recommendation: BUY Analyst: William Schipke

Used Car Salesmen are Caricatures for a Reason

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...And They Are Endangered

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Investment Thesis

Recommendation

Carvana Co. (NYSE: CVNA) is a BUY because it is the first mover to revolutionize the used-car retail industry. It is a disruptive company not just because it offers next day, free delivery, vending machines where you can get your car, or the ability to buy a car and receive financing within 15 minutes while sitting on your couch. It is disruptive because it is attacking the entropy of buying a used car ? no hassles, no ulterior motives by salespeople, no time wasted wandering around a small lot ? and centering its business on the customer with a 21st century, asset-light business model.

Rationale

1 Carvana's Solution to Buying a Car ? Best Selection, Best Value, & Best Experience

2 Unparalleled Business Model & Strategy

3 Scaling Internet Business, Feedback Loop, and Optionality

Price Target: $47.07 +30.3% Upside to Current Price of $36.14

Source: Company Filings

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Company Background

Company Overview

Leadership Team

? Leading eCommerce platform for buying used cars

President & CEO Ernie Garcia III

? Launched first market in 2013 (Atlanta), now 84+

? Co-founded company in 2012

? 2015 Revenue: $130mm

Financial Highlights

Share Price (as of 2/20/2019)

2018 Est.: $2 bn $36.14

? B.S. in Mgmt. Science and Engineering from Stanford Uni.

? Held various roles at Drivetime Automotive Group including MD of Corporate Finance

Enterprise Value 2017 Revenue

$5.03 bn $858 mm

CFO Mark Jenkins ? Joined in July 2014 ? Prior ? Finance Professor at Wharton

EDITDA Margin

( 16.7% )

? Ph.D. in Economics from Stanford

3 Year Revenue Growth CAGR

148.8%

? Dissertation on Auto Lending Market

Post-IPO Share Price Performance ($/share)

$80 $70 $60 $50 $40 $30 $20 $10 $0

Apr-17 May-17 Jun-17

Three straight quarters of revenue and retail unit spark

buying

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18

CVNA falls as large retailer invests in rival company

(49.0%)

Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19

Source: Company Filings and Website

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Primary Discovery

Lorenzo Garza's Background

? Notre Dame Class of 1995 ? Accounting Major

? Previous Retail Experience ? District Manager, Gap ('94 - '07)

? Store Leader, Apple ('07 ? '17)

? Time at Carvana ('17 ? Present) ? Territory Manager ? Senior Manager, Expansion*

? Duties include overseeing logistics and planning in market penetration

Interview Goals

? To get a better idea of how expansion into new market cohorts may differ and how soon will management's market goal be reached

? What is the real differentiator for Carvana's business model

? Find an insider's outlook on the overall industry

? Discuss the largest threats to companies survival (i.e. financial as well as business risks) and what he'd say to short-sellers

Key Takeaways

Process =

Everything

? Installing company's entire process around the most painless, customer-centric goals

? Positive touch points w/ scale

Experience =

Biggest Risk

? Over negative cash flow, said largest risk to company is not keeping the experience the same

? Proof of Concept

Expansion

? Couldn't give specifics on timing of 200 market goal

? Verified the logistics benefits of hub-in-spoke system

Vs. Shorts

? "Legacy Thinkers" ? Carvana goes the extra mile

? Birthday Story

Source: AIM/Bryson 2018.

Source: Schipke/2019

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Industry Overview

Large, Yet Fragmented Industry

? Auto-dealers make up 21% (largest) in Consumer Retail Vertical

? 40 million cars sold annually

Porter's Five Forces

Threat of Entry

Medium

93.0%

2.0% 5.0%

CarMax Other Top 100 Dealers

Opportunities & Threats

White Space

Supplier Power Low

Rivalry High

Threat of Substitutes

Low

Buyer Power High

Customer Age Distribution ? Future Adoption

? Resilient, Millennial consumer and lower interest rates

? Expansion to ~all U.S. Population ? Only 57% currently

? Rising Auto Loan Delinquencies, lower ASPs, and Dry Credit

Markets

? Economic Contraction

Source: Company Filings

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Best Value, Best Selection, Best Experience

Best Value

Pooled Inventory

Lower Financing

Costs

Lower Variable

Costs

Best Selection

? Result in lower average days to sale

100,000

? Less depreciation per vehicle results in higher selling price

80,000 60,000

? Vertically integrated lending platform reduces transaction times and costs ? which flows to customer

40,000 20,000

? Lower variable costs (in-house

- -

reconditioning, etc.) are passed through to customer. ? Approximately $1,000 cheaper cars

FY'15 FY'18 FY'21 Retail Units Sold

Best Experience

800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 - FY'24 FY'27 FY'30

Carvana Inventory

Seamless Platform

No "Profit Motive"

Quick Financing

GAP & VSC

Free Delivery

7-day Test Drive

100 Day Warranty

Referrals

Source: AIM/Bryson 2018.

Source: Company Filings, YipitData, Schipke/2019

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