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According to a report by DealerSocket, there are nearly 63,000 used car dealerships in North America, which include 45,000 independent used car dealerships and 18,000 franchise dealerships. The biggest among these dealers holds a 1.6% market share of the US market. Recently listed Carvana (NYSE: CVNA) is trying to become a leading player in the market.

Carvana’s Offerings

Phoenix-based Carvana was founded by Ryan Keeton and Ernie Garcia in January 2013 as an online option for used car sales. Carvana offers a unique and convenient way of buying used cars. Its platform allows users to research and identify a vehicle, use its proprietary 360-degree vehicle imaging technology to inspect the vehicle, arrange for financing and warranty options, and finally purchase the vehicle and schedule delivery or pick-up from its web-page or mobile app. Carvana’s process allows the entire process to be completed in as little as 10 minutes. Other online used car websites act as marketplaces by connecting buyers with sellers, Carvana’s process covers the entire car buying process.

Carvana uses proprietary algorithms to optimize its nationally pooled inventory of more than 7,300 vehicles. It has a network of professionals who inspect and recondition the vehicles based on a 150-point inspection process. Carvana also provides the customers with the option of either getting the cars delivered to their homes or to pick up the vehicle at a proprietary vending machine.

Carvana’s first market in Atlanta was launched in January 2013 and till the end of last year it had purchased, reconditioned, sold, and delivered approximately 27,500 vehicles to its customers. As of December 2016, Carvana’s in-house distribution network was servicing 21 metropolitan markets. It plans to expand to international markets this year. In the last quarter, Carvana expanded its domestic presence to 7 more markets.

Carvana’s Financials

Carvana’s revenues have grown from $4.6 million in 2013 to $41.7 million in 2014 to $130.4 million in 2015. For the year ended December 2016, revenues grew 180% to $365.1 million. The company’s business model is highly capital intensive. The used car market also has very low margins that translate into heavy losses for the company. Losses have grown from $36.8 million in 2015 to $93.1 million in 2016.

Recently, Carvana announced its second quarter results. Revenues grew 142% to $209.4 million, and losses grew to $38.9 million, from $18 million a year ago. During the quarter, retail units sold increased to 10,682, growing 145% over the year. The market was looking for revenues of $198.8 million and a loss of $0.30 per share for the quarter.

For the current quarter, Carvana expects to earn revenues of $225-$255 million with an EBITDA loss margin of (14%)-(16%). It expects to end the current year with revenues of $850-$910 million and an EBITDA margin of (14%)-(16%).

Till earlier this year, Carvana had raised $460 million from unnamed investors so far. Its last round of funding was held in August 2016 when it raised $160 million at an undisclosed valuation.

Carvana’s Acquisition

Earlier this quarter, Carvana also announced the acquisition of competitor Carlypso for an undisclosed sum. Like Carvana, Carlypso too was an online used car sales web site. But, it evolved to becoming a site that provides buyers with access to used vehicles that were being sold by fleets or other wholesale markets. Carlypso is known for its data and analytical tools that are able to value a vehicle more accurately than a physical inspection would. Carvana will be able to leverage this intelligence to get more data about the features of the vehicle, thus enabling more accurate bids for its vehicle inventory.

In April this year, Carvana went public and raised $225 million by selling 15 million shares at $15 each. The listing valued the company at $1.8 billion. Its stock is currently trading at $17.53 with a market capitalization of $2.74 billion. It had touched a high of $23.70 soon after listing.

I still have doubts about Carvana’s future. The used car selling space has seen quite a few failures recently. Last year, Beepi, once a Billion Dollar Unicorn prospect, shut down and was sold for scrap. Beepi was known for its extravagance, a vice that Carvana has managed to control. Listing on the stock exchange should, hopefully, maintain the financial prudence. But Carvana will have to show a path to profits if it hopes for its stock price to grow.

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