On The Hunt For Fallen Angels

It can be interesting and profitable to look at companies several months after an IPO. That is about the time when the initial excitement has calmed down.
This is usually about the time when the lack of sell side following can hurt stock prices and in turn provide value to investors.
Take Carvana Co. for example. Underwriter’s lead by Wells Fargo Securities took CVNA public on April 28, 2017 at just 11 per share. The shares jumped to 24 before falling to the current level around 14.

Would You Buy A Used Car From Ernie?

Lots of folks want to be the next CarMax or TrueCar and Ernie Garcia III is no exception. The Stanford graduate honed his consumer finance skills for over 10 years before getting involved in the used car business back in 2011 when he formed Carvana.
Carvana sees itself as a leading eCommerce platform for buying used cars. Ernie is out to transform the used car buying experience with a wide selection, a superior price/value proposition using transparent pricing in a simple no pressure environment.

If that sounds like just another used car sales pitch, it is. Here is what Ernie says makes Carvana stand out from the others.

Using the Carvana platform, consumers can research and identify a vehicle, inspect it using proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices.

No More Showroom Sales Delays
Their transaction technologies and online platform transform a time consuming process by allowing customers to secure financing, complete a purchase and schedule delivery online in as little as 10 minutes: instant gratification!

Carvana lays claim to proprietary algorithms to optimize a nationally pooled inventory of over 7,300 vehicles, inspect and recondition vehicles based on their “Carvana Certified” 150-point inspection process.

Ernie and the Carvana team operate their own logistics network to deliver cars directly to customers as soon as the next day. Customers in certain markets also have the option to pick up their vehicle at one of several proprietary vending machines, which provides an exciting pick-up experience for the customer while decreasing costs.

A Road Tested System

Carvana is no startup. Between January 2013 and the end of 2016, 27,500 vehicles were purchased, reconditioned, sold and delivered to online customers. Carvana serve 21 local markets. The number nearly doubled last year and more are to be added.

The growth trends are impressive. From 2105 cars sold in 2014 to 18,761 in 2016. Revenues during this time:$41 million to $379 million.

Carvana is loosing money, $0.72 per share in 2016. There are bright spots mixed in the red ink. The company turned gross profit positive last year. The trend is moving in the right direction.

Use of Proceeds

Car dealers are leveraged so most of the $220 million proceeds is going to clean up the balance sheet.


Carvana is relying on their vertically integrated business model to provide a meaningful and sustainable competitive advantage.

These claims may not sound much different from CarMax or TrueCar, but that may not be the key issue.

The U.S. used car marketplace is highly fragmented. There are approximately 45,000 independent used car dealerships and nearly 18,000 franchise dealerships.

According to Edmunds.com, the top 100 used car auto retailers collectively hold approximately 7.0% market share. So the pie is large and the slices are small. What about Ernie?

Well-Educated Management

Ernie Garcia, III co-founded has been President and Chief Executive Officer since 2012. He has spent more than 10 years in the auto and personal finance business. He holds a B.S. in Management Science and Engineering from Stanford.

Mark Jenkins is Chief Financial Officer. Mark was a professor at The Wharton School from 2009 to 2014. Mark received a Ph.D. in economics from Stanford and a B.S.E. from Duke in Mathematics and Civil Engineering.

Ben Huston co-founded and Chief Operating Officer. He holds a J.D. from Harvard Law School and a B.A. from Stanford.

With all this brain power, maybe the company should be called SmartCar.