Used car ecommerce platform Carvana (CVNA) saw its share price soar in the last trading day, after delivering a quarter report with missed earning estimates.

Interestingly, there was a dip (of 4%) in the after market trading immediately after the release, before recovering, and surging.

Someone from Motley Fool tried to explain this, however it stopped at just quoting some numbers to show that demand is surging.

The initial dip and later surge clearly showed that investors were initially reacting to the headlines, but found something super reassuring in the earning call. You can find a copy of the transcript, at Motley Fool, as well.

Solving the supply problem 

In addition to showing a sentiment of fast recovery:

We grew units by 25% in the quarter, including decreases in sales year-over-year in early April and growth of approximately 40% later in the quarter.

 

 

 

 

we also saw a significant improvement in supply:

The most notable is that we hit our long-term milestone of buying 100% as many cars from our customers as we sold to them in July.

 

 

 

 

We also know that demand is NOT a problem for used cars in the US – if you can source for cars, you can sell them. Supply, including sourcing and logistics, however, is not easy and required a lot of operational effort to secure, and scale. It is the key challenge for Carvana’s growth, versus chain dealerships.

From the Q&A part of the earnings call, the 100% is mentioned a few times, including this comment from Mark Jenkins, CFO:

Sure. So there are definitely some exciting trends in retail GPU. I think the most exciting is that, as I mentioned earlier, in July, we bought more than 100% as many cars from customers as we sold to customers. We think that that was basically I could probably, call it, 10% to 15% in April when we paused purchasing for customers. And it’s just been on a basically straight line upward since then.

I think that’s obviously a positive, that drives wholesale GPU, that drives incremental retail GPU, because cars that you acquire from customers are typically more profitable than cars that you acquire at auction. We’re actually acquiring fewer cars from auction now currently than at any point since early 2018. So I think that generally points to a pretty strong dynamic in retail GPU.

In addition to that, just technically, we do expect average days of sale to come down in Q3 relative to a high in Q2. And that’s just basically a technical dynamic with when we stopped purchasing cars, that led average day sales to increase in Q2. And now that we’re actively purchasing cars, particularly from customers, but in general, we expect it to come down in Q3, which will also be a tailwind.

We benchmarked Carvana in Momentum Works’s recent report “Used Car Marketplaces in Southeast Asia”. We believe that a key factor of its success was the relentless focus on cost reduction and quality standards at each part of the value chain.

This is the core business of any used car platform:

We also explained that used car sector is less impacted by Covid-19.

Tail wind in Southeast Asia

In fact, in Malaysia, it even enjoyed record sales:

We have also compared strategies of the major players in Southeast Asia (BeliMobilGue, Carro & Carsome), and we do believe that Carvana’s recent share price surge would give more insights to how to make this sector work in Southeast Asia:

The “Used Car Marketplaces in Southeast Asia” is free and you can obtain a copy by emailing us at hello@mworks.asia.

We will analyse the impact of covid-19 for the used car sector in Southeast Asia in more details over the coming weeks, stay tuned on TLD!

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.