Executive Summary:
Carvana is an online platform that buys and sells used cars. The whole buying experience takes place online, and consumers got the choice to have their cars delivered to their homes or pick them up at one of the company’s famous car vending machines.
The business model of Carvana is based on selling the cars it buys up at a higher rate than they were purchased for. Additionally, the company makes money by allowing users to finance their vehicles and charging interest fees on the issued loans.
Founded in 2012 and based out of Phoenix, Arizona, the company has been a huge success so far. In 2017, Carvana went public on the New York Stock Exchange.
How Carvana Works
Carvana is an online marketplace that trades used cars. Buyers can shop from an array of vehicle options, either on Carvana’s website or via its mobile apps.
Cars can be bought in cash or via one of the company’s available financing solutions. The company offers a free loan calculator that, based on the parameters added, will estimate the customer’s monthly payment rate.
Once a purchase is made, cars are either delivered directly to the customer’s location or can be picked up in one of Carvana’s so-called car vending machines. If the customer lives too far away from any of the available delivery spots, Carvana will subsidize up to $200 for a flight and pick the customer up from the airport – free of charge.
The company claims that the used cars the platform offers are accident-free, no damage to the car’s frame, and go through a 150-steps inspection process before being sold.
Furthermore, vehicles can be returned up to 7 days after delivery, which allows buyers to test out the car.
Carvana offers similar flexibility on the sales side. Sellers either have the opportunity to sell their car or trade it in. All the customer has to do is enter in their license plate or vehicle identification number (VIN).
After entering some additional details an offer is given within two minutes. Carvana takes care of the pick-up and transfers the money after a quick on-site check.
Carvana is available in the US only, servicing over 40 states and 300 locations nationwide. The platform currently offers more than 25,000 vehicles for purchase.
Where Does Carvana Get Their Cars?
In its most recent earnings report, Carvana has stated that most of the vehicles it acquires are sourced from national used-car auctions as well as directly from customers who sell their car to the company.
Acquiring directly from customers has two major advantages for the company, namely removing auction fees as well as being able to buy up a more diverse set of vehicles. This gives customers on their platform more choice.
The remainder of their car inventory is sourced from rental car companies, vehicle finance and leasing firms, and other suppliers.
A Short History Of Carvana
Carvana, based in Tempe, Arizona, was founded in 2012 by Ernest Garcia III (CEO), Ryan Keeton, and Ben Huston.
Garcia III is the son of Ernest Garcia II, a billionaire businessman. At age 33, Garcia II pleaded guilty in 1990 to a bank fraud charge and sentenced to three years of probation.
His financial bounce back started with the foundation of Ugly Duckling, a rental car provider he purchased for under $1 million. After failing to turn the business around, Ugly Duckling merged together with a car loan company.
The company focused its efforts on selling and financing cars to people with a poor credit history. Amid the tech bubble, Garcia’s Ugly Duckling raised $170 million in its IPO. With the collapse of the stock market, Ugly Duckling’s stock plummeted from $25 to $2.5.
This allowed Garcia II to take full control of the company, buying back the rest of the shares he didn’t own for $18 million.
He renamed the company to DriveTime, which became one of the most valuable American car resellers with annual revenues exceeding $2.5 billion.
Garcia’s son, Ernest Garcia III, joined DriveTime in 2007 after graduating from Stanford and a short stint at the Royal Bank of Scotland.
In 2010, he tried his luck as an entrepreneur when he, together with Huston (whom he met at Stanford) and Keeton, launched a startup called Looterang which was a mobile app for local and personalized deals. Unfortunately, the startup failed not long after.
They figured that the next time they would launch something was to be in an industry they knew inside out. And since Garcia III had worked with his father since he was 15, he felt particularly confident that they could disrupt the car dealership industry.
In 2012, Carvana started out as a subsidiary of DriveTime. Initially, the mother company purchased some of Carvana’s automobile loans. Furthermore, DriveTime helped the startup to build out its core technology platform while providing additional financial and human capital support.
The bet paid off fast. By 2014, Carvana spun out of DriveTime to become its own, independent company. Garcia III even removed himself from the board of directors to avoid any future problems due to his criminal past.
In the years to come, Carvana continued expanding into more and more markets. Due to Garcia III’s connections, capital injections for the company were always around the corner. Billionaire Mark Walter (CEO and owner of Guggenheim Partners, an investment firm with over $300 billion of assets under management), for instance, invested millions into the company when it was still private.
Another major draw is the company’s strategically placed car vending machines and the process of picking the car up. Buyers, similar to a classic vending machine, had to insert an oversized coin and would receive their car directly from the vending machine. This often created word-of-mouth, especially due to the vending machine’s strategic locations (often visibly placed across highways).
The company’s continued growth led to its IPO in April 2017. The company’s share price and financial performance has been promising ever since. Since going public, Carvana’s shares climbed from $20 to over $100, representing a fivefold growth in a span of three years.
Nevertheless, the Garcia family hasn’t escaped trouble altogether. A recent Delaware lawsuit claimed that the family (along with other investors and company directors) used concerns regarding COVID to buy Carvana stock at a bargain price – all the while knowing that the company wasn’t negatively affected by the pandemic. The results of the lawsuit are still pending.
Despite its legal troubles, Carvana continued to grow immensely. 2020, in particular, became an extremely successful year for the company as traditional car dealerships were severely affected by contact reductions due to the coronavirus pandemic.
As a result, in March 2021, the company announced it would invest an additional $500 million in launching new facilities and hiring more staff. Around the same time, it also became one of the youngest companies to ever be listed on the Fortune 500.
Next to the pandemic, Carvana also profited from global supply chain issues and major chip shortages, which stalled production outputs for many car manufacturers. Therefore, sales of used cars accelerated even further throughout 2021.
Unfortunately, the substantial increase in demand also caused some major issues. Caravan customers filed hundreds of complaints with the Better Business Bureau with regards to delivery delays, mistakes in paperwork processing, and more.
In August 2021, for instance, Carvana was suspended from selling cars for six months at its Raleigh, North Carolina facility as it broke the state’s dealer licensing laws. It also paid $850,000 in fines to four counties across California as a result of a civil lawsuit after Carvana transported without the required license.
Despite the public backlash, there was also some positive news. In October, Hertz announced it would sell vehicles from its rental fleet to Carvana. This would enable Carvana to purchase even more cars at a much faster pace.
Despite the increasing competition that Carvana began to face, including the launch of GM’s CarBravo marketplace in January 2022, it continued to grow at a rapid pace. It grew revenues, on the backbone of a heated car market, by 129 percent in 2021 alone.
Unfortunately, the tide would soon begin to turn. Rising inflation and a heightened interest environment led to a more than 90 percent decline in its stock price (from November 2021 to April 2022).
As a result, Carvana announced that it would lay off 2,500 employees after posting a Q1 2022 net loss of $506 million.
Today, around 7,500 people are employed by the company, which operates in more than 300 locations across the United States.
How Does Carvana Make Money?
Carvana makes money from the sale of cars offered on its marketplace. It turns a profit whenever the company is able to sell a used car for more than it was bought for (including costs such as marketing, inspection, transportation, etc.).
While still hugely unprofitable (more on that later), the company’s thesis is that it may become a sustainable business once it hits a sufficient amount of scale.
Being an online platform, Carvana does indeed pose several advantages over a traditional car dealership. These include:
- Price transparency: users can compare vehicle prices across several characteristics such as car age, mileage, brands, etc.
- Users can search for cars from the comfort of their home (or anywhere they like), which results in additional time savings
- In some instances, buyers may not have to deal with a pushy salesperson
- Cars are available (almost) nationwide with locations continuing to expand
- Users should have a unified purchasing experience across all Carvana locations, which may (!) create additional comfort in the buying process
- 7-day return guarantee, granting buyers the ability to test out vehicles before fully committing
Some of the above-listed features may also be part of the traditional car dealership experience. But what makes Carvana stand out is that it combines all the above into its buying experience.
According to Rich Barton (founder of Expedia, Glassdoor, and Zillow), more people expect a seamless and instant buying experience. He calls it the uberized consumer. For Carvana, it is therefore essential to continue on its growth trajectory by adding more cars and pick-up locations to its platform.
With growth comes also the opportunity to cross-sell additional services. Right now, Carvana also makes money through its financing offerings by charging interest on the monthly fee. In the future, the company could, for instance, expand into selling spare parts or repairing services.
Additionally, its increasing relevance should also enable Carvana to negotiate even better terms. As previously mentioned, it was able to strike a deal with Hertz in October 2021.
It can be assumed that Carvana will likely receive massive discounts since it purchases hundreds of vehicles. On top of that, the cost of picking up the cars should be substantially lower as well since Hertz can place them at a few locations, which allows for bulk shipments. This should help Carvana to substantially increase its margins.
Carvana Funding, Valuation & Revenue
According to Crunchbase, Carvana has raised a total of $1.6 billion in five rounds of venture capital funding. Notable investors into the company include the likes of Y Combinator, Ally Financial, Georgiana Ventures, and many others.
Carvana was valued at $2 billion during its IPO in April 2017, in which the company raised another $225 million. Today, Carvana is valued at about $43 billion.
For the fiscal year 2021, Carvana reproted annual revenues of $12.8 billion, up 129 percent from the year before. It sold more than 425,000 cars in that same timespan.
