Digital and disruptive, Carvana may be the Amazon of used car sales. But one analyst thinks comparison with another Dow Jones giant, brick-and-mortar retailer McDonald's, may also hold. Carvana stock reversed lower on Monday despite a price-target hike, after notching a fresh high intraday and more than tripling year to date.
Carvana May Resemble Amazon — And McDonald's
Like many investors, analyst Jeff Lick of Stephens sees parallels between Carvana and Amazon, given their direct-to-consumer business models. But in a note to clients last Wednesday, he wrote that Carvana also borrows heavily from McDonald's decades-old playbook, which merits a deeper look.
He counted off two major similarities between the online used car seller and the burger chain: First, giving the customer what they want quickly, efficiently and consistently. Second, relentlessly stripping out costs to improve profits.
"We believe anyone that has familiarity with or has ever worked in a McDonald's restaurant will quickly see and grasp these similarities when they tour a Carvana reconditioning center," Lick said.
Inspection Centers Key To Carvana Profit Metric
In June, Lick was among a group of analysts who toured Carvana's Rocklin, Ca. inspection and reconditioning center, one of 17 nationwide. The facilities are where every incoming used car is processed before reaching the hands of Carvana customers.
At the Rocklin facility, the analyst found that Carvana breaks the reconditioning process into eight components: inbound logistics, inspection, parts, cosmetics, build, detail, quality control and photographs. That multistep process is underpinned by a proprietary software technology platform called Carli. Lick concluded that Carvana's "process engineering" resembles McDonald's because employees can follow along with "precision and repetition."
"All this leads to an industry leading used vehicle gross profit per unit," Lick said.
Already, Carvana is the most profitable used car seller by that metric. In the second quarter, its retail gross profit per used vehicle jumped 28% vs. a year ago to $3,421. That compares to the $2,269 gross profit that larger rival CarMax realized per unit sold in Q2, in line vs. a year earlier.
For all the hype about its car-vending machines, Carvana calls its inspection centers the "heartbeat" of the company.
Carvana Stock Pegs High After 240% Rally
Shares of Carvana shed 0.2% to 179.73 on the stock market today. Carvana stock turned lower after making a new 52-week high of 183.41 in Monday morning trade. The used auto retailer is extended nearly 40% from a June breakout past 129. That puts the stock well into a profit-taking zone. It also bounced off its 10-week moving average in August and September, providing fresh buying opportunities.
On Monday, analysts at Wedbush Securities raised their price target on Carvana stock to $175 from $150, according to TheFly.com. The firm now forecasts Q3 sales of 108,100 used vehicles vs. its prior 105,300 estimate, and FactSet consensus estimates of 106,000. The analysts cited rising website traffic for the online used car retailer. They also see better traffic conversion due to higher inventories, lower average selling prices, and incrementally lower car loan rates, improving vehicle affordability. The Fed has begun cutting interest rates. However, Wedbush kept a neutral rating on the used car seller's shares.
CarMax stock shed 1.1% on Monday, falling further below its 200-day line. Dow Jones retail giants Amazon and McDonald's also fell.
Amazon began new vehicle sales on its website this year.
Carvana Ally Warns On Delinquencies
Stephens's Lick rates Carvana stock at overweight with a $190 price target. With its regional reconditioning centers and digital showroom, Carvana is "transforming the supply and demand side of the used vehicle business" both, he says.
But the analyst flagged an area of concern.
Carvana provides in-house car financing and sells receivables to Ally Financial and others. Ally warned in September of rising delinquencies on the car loan side of its business.
"Poor credit decisions and a deterioration of receivables performance could lead to less future funding of Carvana's finance efforts," Lick wrote. He added this "would have a negative impact on future sales and future profits from the sale of receivables."
Ally stock rose on Monday and is up a fraction year to date. So far this year, Carvana stock has surged 240% on the back of an earnings breakout in February and another earnings surge in May. It remains well below all-time highs after plunging in 2022 amid bankruptcy fears.
Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.
