Consumers waiting for interest rates to come down to make their next big purchase could finally get the green light they’ve been looking for tomorrow.
The Federal Reserve is set to meet Wednesday and announce its significant first federal funds rate cut since 2020, with additional rate cuts expected in the months ahead.
The one-two punch of persistent inflation and increasing borrowing costs has rocked consumer buying power, especially when it comes to making large purchases such as a new home or vehicle.
While mortgage rates show signs of easing, used car loan rates have held higher, with the average loan rate reaching 11.3% in August. (Compare that to 7.1% on a new vehicle.)
Now, there’s a light at the end of the tunnel.
It’ll take some time for any Fed rate cuts to trickle down to real borrowing costs for everyday Americans. But as we know, investors have been looking forward to rate cuts for months. The impact on stock prices could be swift.
LikeFolio is here to keep you ahead of the curve, leveraging our predictive insights to home in on the next consumer-facing stocks set to pop (or drop).
And this week, just in time for the Fed’s critical rate cut decision, our data revealed a new leader in the used car market that you need to know about…
A New Leader in the Trillion-Dollar Used Car Market
According to LikeFolio data, Carvana (CVNA) has officially overtaken its used car competitor CarMax (KMX) in consumer web interest – our most valuable metric for understanding how many cars are changing hands.
The e-commerce used car platform has reinvented itself over the last year, leveraging efficiency and a used-car, salesman-resistant consumer to send its stock up 222% in 2024 alone.
Despite the impressive rally, we’re not betting against CVNA anytime soon.
Earlier this year, the company set new, aggressive 12-month targets focused on improving efficiencies in areas like recon costs, inbound transport, wholesale growth, financing, and customer service.
The goal is to drive further growth and profitability. And its ambitions are clearly paying off.
Carvana has expanded its gross profit per unit (GPU) massively over the last decade, now counting more than $7,000 in profit per vehicle sale versus just over $300 in 2014.
The company logged 101,440 retail units sold in the second quarter (ended June 30, 2024) and achieved a 10.4% adjusted EBITDA margin, the highest in its history, showcasing its ability to turn sales into profit effectively.
How?
Technology, operating improvements, and process standardization.
Carvana is proving to be a poster child in how to leverage technology – namely, artificial intelligence (AI).
CVNA has actually effectively integrated AI to improve customer service, apply personalized search recommendations, and simplify the transaction process. One customer shared how they could complete their online car purchase in under 10 minutes, a process that used to take over an hour.
In addition, its own growth and rising inventory is helping to improve its logistics network. This is an example of scale and experience.
Perhaps most exciting for its future prospects? Carvana has barely scratched the surface in the $1 trillion U.S. used car market.
“We sold over 100k cars in Q2, making us the second-largest used automotive retailer, and one with just 1% market share.”
– Letter to Shareholders, July 31, 2024
The web traffic chart above suggests the company is certainly making inroads there.
On the macro front, Carvana faces a tough interest rate environment, but like I mentioned, that may be getting better soon.
The company noted on its last call that car prices are now only about 3% higher than pre-pandemic relative to CPI (Consumer Price Index), but payments are still about 10% higher due to higher rates.
If rates continue to fall, it is likely to fuel vehicle demand even more.
We expect Carvana to continue to benefit from its efforts to squeeze more profit out of every vehicle, with improving macro trends (namely, falling interest rates) potentially providing an added boost.
Bottom line: CVNA deserves a spot on your “September Slump” watchlist – any seasonal pullbacks this month could serve as a long-term opportunity.
Until next time,
Andy Swan
Founder, LikeFolio
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