Carvana Stock (NYSE:CVNA) : Changing the Used Car Market as We Know It

A disruptive business, which is a business with a product or service that displaces and eventually replaces existing market leaders, has the potential to become a fantastic investment. This is particularly true if you have the foresight to invest early in a disruptive business. Just look at companies like Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) for the perfect examples of disruptive businesses that were generational investment opportunities.

Carvana (NYSE:CVNA) is a company that is disrupting the used car industry and its stock has risen sharply over the last several months. You might have heard about this company’s intriguing “car vending machine” marketing strategy and how it offers car shoppers the ability to browse a large selection of used cars online. Many investors are wondering whether or not Carvana stock can continue its upward momentum, particularly since it is currently trading at all-time highs. Let’s take a deeper look at Carvana’s business and growth prospects below.

Cutting Out Dealerships Entirely

If you’ve ever gone shopping for a used car before, you are probably familiar with some of the downsides of the experience. Used car dealers have a reputation for being high-pressure salesman that will do absolutely anything to get you to leave the dealership with a car. That’s why Carvana offers such an intriguing business model – customers can skip all of the things that they dislike about used car shopping and save money in the process.

The used car market is absolutely massive, which is why Carvana has interesting investment potential. The process of buying a used car on Carvana’s website is stress-free and simple. You can search for cars, take a 360-degree tour of the vehicle you like, and even obtain financing all on the company’s website. The used car you buy can be picked up at one of Carvana’s “vending machines” or delivered directly to your home. If a customer isn’t satisfied with their purchase, Carvana offers a 7-day money-back guarantee on all of their used cars. This business model has the potential to make used car dealerships obsolete, which is part of the reason why the stock has performed so well lately.

Unprofitable for Now

We know that Carvana’s business model is innovative and disruptive, and the company has been making a lot of positive progress in terms of increasing revenue and units sold. When it announced its Q1 2020 financial results, retail units sold increased by 43% year-over-year, and revenue grew to $1.1 billion which was an increase of 45% year-over-year. This impressive top-line growth is promising particularly when you consider the demand impact in early March from the pandemic, but management still has a lot of work to do to justify the company’s current valuation.

Like many growing companies, Carvana is struggling to achieve profitability. The company posted a net loss of $183.6 million in Q1 and has yet to achieve a profitable quarter. With a balance sheet reflecting rising operating expenses and debt levels increasing for the company, it seems that this company has a long road ahead before it becomes profitable. This is absolutely something to monitor if you are interested in buying Carvana for the long-term, but if revenue and sales continue rising for the company there’s no reason why it can’t become a profitable business in the future.

Positive Momentum

Perhaps one of the biggest reasons to be interested in Carvana stock has to do with the positive momentum it has working in its favor. Consumers are becoming more and more comfortable with purchasing things online, even with big-ticket items like cars. It’s also important to note that with the current global pandemic, Carvana is directly benefitting thanks to its remote business model. If people want to buy a used car at this time, they can do so from the safety and comfort of their homes. We know that e-commerce sales are soaring as a result of the pandemic, and Carvana will definitely benefit from this trend.

Growing Company with Possible Speed Bumps

Carvana is changing the entire used car market as we know it, and investors have absolutely loved the stock in recent months. With that said, it’s hard to justify opening a new position in Carvana at this time due to its recent run-up to 52-week highs and uncertainty regarding profitability. Although this company looks like it has massive potential in the coming years, it’s probably best to wait for a significant pullback before adding Carvana stock to your garage.