E-commerce used-car seller Carvana (CVNA) has made a splash with its gimmicky "vending machine" model of selling cars from flashy automated showrooms in the South.
But if Friday's showing on the New York Stock Exchange is any indication of its future success, with shares trading down 14% to $12.88, then the upstart may be scaling a rocky mountain to reach its goal of hitting profitability while expanding throughout the country.
"We'll be growing as fast as we can," Carvana founder and CEO Ernie Garcia III told TheStreet on Friday. "We are basically [an] online dealership. We are buying the inventory and selling the inventory. We make money based on the spread of the price between what the customers make [when they sell us their used cars] and what we sell it for."
Although revenue surged for the company last year -- some 180% year over year to $365.1 million -- Carvana has had losses each year since 2014.
Total losses have amounted to $145.1 million over the past three years. According to Carvana's prospectus, the company generated a net loss of $93 million for 2016 and $37 million for 2015. Additionally, noted the filing, the latest operating results for the three months ended March 31, 2017, won't be available until after the offer is completed. The lack of details on year to date performance may be spooking some investors.
Garcia told CNBC Friday that its losses are connected with growth.
The company's business model, which stresses ease and convenience for the buyer, is a costly one. A customer selects the car, and Carvana delivers it the next day for a fee. Or, Carvana will reimburse a customer $200 on a one-way airfare to travel to one of its vending machine (showroom) locations in Atlanta, Nashville, Houston, Austin and San Antonio, which feature a multi-storied lighted glass tower filled with gleaming used cars and a kiosk for which a customer uses a special coin to bring the car to him or her. A customer has seven days to return the car.
In its filing, the company says its goals are developing its existing markets and expanding into others, increasing brand awareness and new products. The four-year-old company is now in 21 markets and has 8,000 cars in inventory.
According to the filing, Carvana listed other risks for investors to consider: its ability to effectively manage its rapid growth, its limited operating history; the seasonal and other fluctuations in its quarterly operating results; the Garcia Parties' control over stockholder approval, including the election of directors; and its relationship with DriveTime, a used car retailer and finance company, based in Tempe, Ariz.
"We were incubated by, and benefited from, our relationship and a series of relationships with DriveTime that were not negotiated at arm's length, as DriveTime was controlled by our controlling shareholder, who is also the father of the chief executive officer [Ernest Garcia II, a key executive of DriveTime]," noted the filing.
The Garcia father and son each are listed as 10% owners of Carvana.
During an earnings call on Tuesday, AutoNation's (AN) CEO Mike Jackson was dismissive of Carvana, saying, "We've profitable, and they aren't."
Jackson also added that 99% of car buyers prefer shopping at car dealerships over using e-commerce sites, such as Carvana or the California-centered Shift. Jackson declined to give the source of his statistic, and there's strong evidence that disputes his claim. By next year, digitally bought used car sales will hit 3 million, on their way to reaching 3.7 million units by 2022, according to a report from Frost & Sullivan.
Carvana's filing noted that 97% of research for car buying is done digitally, according to the Cars Online 2014 report from Capgemini, and a customer spends some nine hours researching online, according to the 2016 Car Buyer Journey report from Autotrader.
Unlike Carvana, Shift CEO and co-founder George Arison told TheStreet earlier in April that he has no immediate plans to take the company public, as he prefers to grow it in a prudent way and eventually expand to the East Coast.
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