Key Points
- Wall Street investment bank Morgan Stanley describes Carvana as the "apex predator in auto retail."
Motley Fool Issues Rare “All In” Buy Alert
The technology-centric Nasdaq 100stock market index is down 12% so far in 2022, which is a considerable decline given that it's only January. But since history supports taking a long-term view for the best investment results, this rapid downturn in the market might be a great opportunity to buy quality businesses at a discount.
Tech-driven used car dealer Carvana(NYSE:CVNA)might fit that bill. The company has suffered a stock price decline of 58% since hitting its all-time high in August 2021, but leading Wall Street investment bank Morgan Stanley(NYSE:MS)has just come out with a very bullish call. Here's why.
Artificial intelligence and machine learning are buzz-phrases thrown around abundantly in the tech sector. But Carvana uses them both to deliver an unrivaled used-car buying experience to its customers. Its digital approach is so powerful that Morgan Stanley analyst Adam Jonas describes the company as the "apex predator in auto retail" -- and since Carvana has rocketed up the rankings to become the second-largest car dealer in the U.S., he might be right.
Most consumers would be familiar with buying a used car the traditional way. It typically involves a trip to the local dealership, with a salesperson guiding you through the vehicles on the lot. And that highlights a key issue -- your options are usually limited to the inventory the dealer holds on that day. The internet improved this, empowering buyers to seek out the cars they want, but they still need to interact with a specific dealership, plus arrange delivery if they're out of state.
Carvana, on the other hand, offers a fully digital process. Despite having 28 physical "vending machine" locations to facilitate pick-ups and trade-ins, prospective buyers can purchase a vehicle online and have it delivered to them by a company-employed delivery driver. But it takes technology a step further. Using artificial intelligence and machine learning tools, it monitors used-car auctions to identify the hottest-selling vehicles, and then ensures it has an adequate supply of them in its own inventory.
That makes Carvana the ultimate one-stop shop for prospective buyers.
The key to Carvana's success is volume. Adopting a fully digital approach means it has the opportunity to sell significantly more cars, simply because it can reach a much wider audience. In fact, the company claims to serve 80.6% of the U.S. population, and that figure continues to grow.
It explains (in part) the company's rapid growth over the last few years.
Metric | Q3 2018 TTM | Q3 2021 TTM | CAGR |
|---|---|---|---|
Revenue | $1.6 billion | $10.8 billion | 88% |
Gross profit per unit sold | $2,302 (Q3 2018) | $4,672 (Q3 2021) | 26% |
Vehicles sold | 79,875 | 384,393 | 68% |
DATA SOURCE: CARVANA. CAGR = COMPOUND ANNUAL GROWTH RATE. CARVANA REPORTS ITS Q4 2021 RESULT ON FEB. 24 2022.
The company has been helped bysoaring used car priceson the back of new vehicle shortages, thanks tosemiconductorsupply constraints during 2020 and 2021. Used cars have enjoyed a broad rise in value of 37% over the last 12 months, according to the most recent inflation data. It's unreasonable to expect this to continue forever, so some of Carvana's growth is likely to taper off over the next couple of years.
The University of Michigan survey of consumer sentiment also supports this. In December 2021, just 27% of consumers thought it was a good time to buy a car, compared to 58% in the prior-year period. As it turns out, hardly anybody wants to pay inflated prices for used vehicles.
But Wall Street is on board
On Jan. 24, Wall Street investment bank Morgan Stanley reiterated its overweight rating on Carvana's stock, and attached a $430 price target. That represents 173% upside from today's price of $157, so even with potential headwinds on the horizon, the bank thinks Carvana's digital approach is enough for it to continue gaining traction with consumers.
And Morgan Stanley isn't alone. A total of 13 analysts have a buy rating on Carvana's stock, and six have a hold, with an average price target of $344 which represents 119% growth from here.
The broadtech sell-offmight have served up a solid opportunity to add Carvana to your portfolio, but the market remains uncertain, so it's best to adopt a long-term strategy if you do buy the stock.