What Investors Need to Know About Carvana's Third Quarter

In general, people despise the car-buying process -- there's a reason there are so many used-car salesman jokes. But that contempt has bred plenty of opportunities for innovative companies to try to transform the experience into something that's more comfortable and less miserable.

Among those innovators is Carvana Co. (NYSE: CVNA), which has caught the attention of investors thanks to a business model that puts much of the purchasing process online, in combination with a unique vending car-pickup option. Let's dig into its third-quarter results and see how the recently-IPOed car dealer is faring.

By the numbers

For a company such as Carvana in the very early innings of a long game, it's fair for investors to expect significant top-line growth, and the company delivered. Revenue soared 128% to a total of $225.4 million, driven by a 133% increase in retail units sold to 11,719. However, because the company is spending capital to expand its footprint, its loss widened by 81%, from $21.99 million, or $0.16 per share in Q3 2016, to $39.8 million, or $0.29 per share.

"We  achieved several significant company milestones during Q3, as we launched a record nine markets and opened our first West Coast inspection and reconditioning center in Phoenix, bringing the Carvana experience coast to coast," said co-founder and CEO Ernie Garcia in a press release. "Looking forward, we expect to see accelerated growth in Q4, putting us in a strong position as we enter 2018."

Key metric

One key objective for Carvana is to grow its gross profit per unit. During the quarter, its total GPU jumped $395 to $1,742, which was driven by a reduction in average days to sale -- from 105 days during Q2 to 97 days in Q3 -- and increasing the profitability of ancillary products. While there are many important metrics, if investors had to pick one key data point to watch in the coming quarters and years, it would be GPU. The company has set a long-term goal of hitting a GPU of $3,000, and as the chart below shows, it has made great progress thus far, though it expects a seasonal decline during the fourth quarter.

The road ahead

Management continues to expect strong unit, revenue, and EBITDA margin growth heading into the last quarter of 2017. However, due to typical seasonal factors and its annual Cyber Monday promotion, management predicts an increase in sales of lower priced cars, which will result in a reduction in its average retail prices. That said, guidance for Q4 still anticipates a retail unit sales increase of between 143% and 168% compared to the prior year, which is solid. That should drive a similar 140% to 168% increase in total revenue, with GPU checking in between $1,500 and $1,650, which is healthy, though a sequential decline.

All in all, the recently IPO'd auto retailer delivered a solid quarter of growth, and if management continues to expand its footprint, grow its top line and GPU, and better utilize the recently acquired peer-to-peer car selling service Carlypso, the company should have plenty of growth ahead.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.