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1 Top Tech Stock That Just Grew Sales by 125%

If you've tried to buy a new car this year, you likely had a difficult experience that potentially involved extensive delivery delays and even sky-high prices. The reason is a global shortage of advanced semiconductors, the critical computer chips that power the increasingly digital features in new vehicles.

This has pushed consumers into the used car market instead, but that has triggered soaring prices there, too. According to the latest inflation data, used vehicle prices have increased by more than 24% over the last 12 months, and overpaying for a used car can be financially irresponsible since they've historically depreciated in value.

But it hasn't stopped consumers rushing to buy, with used-car sales specialists like Carvana (NYSE: CVNA) doing record business. It just delivered a bumper third-quarter result, and here are some of the key details.

Image source: Getty Images.

Over 100,000 cars sold in Q3, again

Carvana isn't a typical used car dealer. It doesn't have enormous car lots where customers can roam around in search of a suitable vehicle; it instead takes a digital approach, selling online and delivering directly to the buyer. If the customer wants to trade in their existing vehicle, they can opt to have it picked up by the company or deliver it themselves to one of Carvana's 29 vending machine locations.

Leveraging digital channels means the company can build a greater level of scale, transact more quickly, and use new tools to engage buyers. For example, it uses artificial intelligence and machine learning to monitor used car auction sales to determine what vehicles are most popular at a given time. Then, it aims to stock more of those vehicles to ensure it always carries the inventory consumers want.

The strategy has resulted in rapidly growing sales.

Metric

Q3 2020 (TTM)

Q3 2021 (TTM)

Growth

Cars sold

222,309

384,393

72.9%

Data source: Carvana. TTM = trailing-12-months.

Carvana has now sold over 100,000 cars in each of the last two quarters, a remarkable feat considering it took the company five years to sell its 100,000th vehicle when it was getting started.

Rising car prices equal soaring revenue and gross profit

The company has undoubtedly benefited from the rush into the used car market. Holding inventory that is constantly appreciating in value means Carvana makes more money for almost no additional expense. Used car prices will eventually reach a top and begin falling as history suggests, but for now, the rewards continue to flow.

Metric

Q3 2020

Q3 2021

Growth

Revenue

$1.54 billion

$3.48 billion

125%

Gross profit per unit

$4,056

$4,672

15%

Data source: Carvana.

Gross profit growth over the last 12 months only tells part of the story. To put it in perspective, gross profit per unit was $206 in 2015, so the current figure represents 2,167% growth over the last six years. As Carvana sells more cars, it achieves scale, which means fixed costs become a smaller percentage of overall revenue, hence a higher gross margin -- even discounting the current tailwinds.

Naturally, the combination of rising prices and record-high vehicle sales also means skyrocketing revenue. For the full year 2021, analysts expect Carvana will generate $12.1 billion in revenue, up from $5.5 billion in 2020 for almost 120% growth.

The stock is a buy, but focus on the long term

Consumers are clearly becoming more comfortable with purchasing vehicles through an almost entirely digital process. Carvana has rocketed up the ranks to become the second-largest used car dealer in America, and over time it won't be a surprise if it snatches the top spot.

But rising vehicle prices also have a downside. According to a University of Michigan survey of consumer sentiment, consumers are growing wary of the current environment. A mere 30% think it's a good time to buy a car right now -- the lowest reading in 12 months, and well off the 61% high from September 2020. This poses a short-term demand risk to Carvana, which could show up in the coming quarters.

That's why it's important to take a long-term view. Any short-term difficulties could prove to be noise three to five years from now, as vehicle buying trends continue to favor Carvana's business model.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Carvana Co. The Motley Fool has a disclosure policy.


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