"The path to profitability is clear," Carvana CEO Ernie Garcia said in an earnings call with investors and analysts this month. "The brand we have built is powerful, and our website and brand assets like the vending machine make a strong impression and tell a clear story to our customers."
Wall Street is buying that line of thinking, even as it appears profits could be far off and retailers adjust to slowing sales and declining used-car values. Carvana shares, after plummeting by 40 percent since the company's initial public offering April 28, have more than doubled since the earnings report. Shares closed at $19.54 on June 19 after closing at $9 per share on June 5.
David Lim, an analyst with Wells Fargo, wrote in a June 7 note that he is maintaining his "outperform" rating, the equivalent of a "buy" rating, citing Carvana's guidance for the rest of the year. Carvana expects revenue of $193 million to $203 million in the second quarter, above the $184 million consensus Wall Street expectation.
"With guidance given, it is now up to management to deliver," Lim wrote.
The Phoenix company has been expanding rapidly. The company operated in nine markets at the end of 2015. By the end of the first quarter of this year, it sold vehicles in 23 markets and has plans to operate in as many as 39 by the end of the year.
In an interview, Garcia said the company chooses which markets to expand into based in large part on where it already operates. For instance, it opened in two markets in Georgia — Macon and Augusta — not far from Atlanta, its first market.
Garcia said that strategy helps to keep expansion costs down. Most Carvana customers choose to have their vehicles delivered to them. Opening in nearby markets helps to expand the company's footprint while allowing it to tap into existing vehicle sourcing and shipping.
"We can buy cars from sources we previously bought from and then ship them to customers in that market," Garcia said. "We have our own trucks there and everything else. It's relatively inexpensive to do that."