Carvana Skirts Used-Car Gloom With Triple-Digit Growth SpurtBy
CEO says falling used car prices may even help company sales
Shares jump 10% after earnings, outlook top estimates
The U.S. automotive industry may be struggling with an array of concerns ranging from sliding used-car prices to rising inventories, but they do not faze the co-founder and chief executive officer of Carvana Co., an online dealer for used cars.
“As the company is growing at a triple-digit rate, I think that any of these macro effects, while present and while we are not immune to them, are small parts of our story,” CEO Ernest Garcia III said in a phone interview.
Garcia, 34, is overseeing a company that is expanding as the eroding value of used cars is among the chief concerns weighing on auto investors’ sentiment. Carvana on Tuesday reported revenue that topped analysts’ estimates in its first earnings report since going public in April, sending shares up as much as 22 percent in Wednesday trading. The sales forecast for the full year also surpassed expectations, providing a respite to investors who have seen the stock fall 36 percent since its debut. Revenue has more than doubled in the last year.
“We are buying the car in the market, we are selling it in the market and so our exposure is very, very muted,” Garcia said. “To the extent used car prices drop relative to new car prices, we would expect that would cause some would-be new car buyers to turn into used-car buyers because they can get such a great deal.”
Analysts are fairly upbeat about the Phoenix-based company that is being called the “Amazon of Used Cars.” Nine of 10 rate the stock a buy. Even the possibility that Carvana’s shares could be controlled by someone with a fraud conviction has not damped the enthusiasm.
Earlier Tuesday, Bloomberg reported that the company’s largest shareholder and the current CEO’s father, Ernest Garcia II, has a criminal conviction tied to the savings-and-loan scandal that erupted in the early 1990s. Garcia III said in an interview he had not heard any feedback related to the Bloomberg report and no one had expressed any concern to the company.
“We are not discounting what occurred in the past regarding Garcia II; however, the company should be judged on the performance of the current management team,” Wells Fargo analyst David Lim wrote in a note to clients, maintaining there is a demand for purchasing used vehicles online. Lim has the equivalent of a buy rating on the shares.
The first-quarter results impressed, despite being hurt by a delay in tax refunds that many used-car buyers use for down payments, analysts said.
“Investors remain overly concerned about potential pricing pressure in the used car market and not enough on the disruptive nature of Carvana’s business model,” BMO Capital Markets analyst Daniel Salmon wrote in a note to clients.