By Philip van Doorn, MarketWatch
The big talk in the auto industry has been around electric cars and their eventual role in autonomous driving.
But the used-vehicle market in the U.S. is more than twice as large as the new-car market on a unit-sales basis. So it’s worth taking a close look at how the used market is evolving and how you might profit from it.
The media is fixated on the other big change in the U.S. auto market — the acceleration of the electric-vehicle industry led by Telsa Inc. /zigman2/quotes/203558040/composite TSLA +12.66% , whose stock rose 245% during the third quarter. You may have missed out on Tesla’s gain, unless it is held by an index fund you own, but there are other ways to invest in the electric-car revolution.
According to Statista.com, 40.8 million used cars and trucks were sold in the U.S. in 2019, compared with 17 million new vehicles sold. You can see market comparisons for the past 10 full years here .
Shares of Carvana Co. /zigman2/quotes/206651606/composite CVNA -1.80% have been on a tear, rising 147% this year. The company buys and sells cars online and uses its own national transportation network to move cars from its nine reconditioning centers to buyers, with cars delivered to their homes, or to one of the company’s “vending machines.” (One is shown above.)
During the second quarter, Carvana sold 55,098 vehicles, an increase of 25% form a year earlier. That’s remarkable when you consider the chilling effect of COVID-19 on the market. At an annualized pace of 220,392 units sold, Carvana would still have captured only 0.5% of total 2019 used-car sales market in the U.S. So there’s a runway for growth.
Gabelli Funds analyst Shawn Kim called the U.S. car market “highly fragmented,” with 43,000 used dealers, including nearly 16,700 franchised dealers (according to NADA) that sell new and used vehicles.
“From an investor’s point of view, that is incredibly attractive,” Kim said.
He believes that because the market is so large and nowhere near to consolidating, Carvana isn’t the only company that will benefit from the online trend. He sees plenty of room for newer, smaller players, such as Vroom Inc. /zigman2/quotes/218801255/composite VRM -1.51% and Shift Technologies, which plans to go public by merging with Insurance Acquisition Corp. , a special purpose acquisition company, known as a SPAC. He also believes the large publicly traded traditional used-car dealers can participate in the online trend.
Kim emphasized the opportunity offered by the public’s negative perception of traditional car dealers.
“Historically, it has been a terrible process,” he said, adding that small local dealers who cannot adopt online technology “are going to be smoked.”
Rebecca Lindland, an auto-industry consultant who has worked for Cox Automotive’s Kelley Blue Book and now operates her own rebeccadrives consultancy, said the transition of the U.S. consumer market from baby boomers to younger generations means “technology is moving at measures of months and years of adoption rather than decades of adoption.”
The ease of online interaction and movement away from the traditional dealer experience, including haggling, places pressure on the industry, she said, especially for “smaller mom-and-pop operations.”
“Companies like Carvana and Vroom appeal to younger buyers,” she said. “They want tech as a convenience and to trust the process.”
More about “trust” in a moment.
Carvana’s head start
Clifford Sosin, the founder and portfolio manager of CAS Investment Partners in New York, says Carvana is the only smart way to invest in the online used-auto trend, because its business model is so “difficult to replicate.”
“One of the things about this business is that it is characterized by enormous economies of scale, scope, skill and trust,” he said during an interview.