Why in the World Is Carvana Betting on Stellantis?

Detroit automakers, still generally known as Ford Motor Company, General Motors, and Stellantis (NYSE: STLA), have much in common as businesses, but the stocks have traded much differently over the past year. While GM has soared nearly 60%, Ford has lagged its rival slightly with a 22% gain, but Stellantis has spiraled 43% lower. For some, Stellantis has been considered a turnaround possibility, and there's one unusual name banking on a Stellantis rebound: Carvana (NYSE: CVNA).

What's going on?

Carvana's mission is to change the way people buy and sell cars, initially with a primary focus on used vehicles and online sales. Some investors might recall the company's unique car-vending machines that help drive brand awareness, provide unique user experiences, and give the company a brick-and-mortar footprint.

Image source: Carvana.

Carvana is now doing something interesting; it's buying new car dealerships. On March 3, it took yet another step forward, buying its sixth new car dealership that more closely connects the used car retailer with Stellantis and new car sales.

The most recent purchase was a Stellantis dealership west of Boston, renamed as Carvana Chrysler-Dodge-Jeep-Ram (CDJR). Carvana previously purchased five other CDJR stores spread between California, Arizona, and Texas. Carvana hasn't given specifics behind its strategy, but it's easy to see the potential gains. Buying physical dealerships will shift the used car retailer to a hybrid model incorporating online sales with local and physical original equipment manufacturer (OEM)-certified inventory.

Beyond that, the strategy will also secure a backlog of used car inventory from trade-ins and off-lease vehicles, boost margins with new car sales, and serve consumers who still want to test drive or pick vehicles up in person. Furthermore, the acquisitions, which are largely in California, Arizona, and Texas, appear to be located to strengthen and extend their national distribution network, which has a heavier East Coast footprint.

The broader strategy makes a lot of sense for the company and its investors, especially when done at a calculated pace -- rather than the rapid and costly expansion that caused the business some difficulties in the past. However, one question remains.

Why Stellantis?

As previously mentioned, Stellantis has traded unfavorably compared to its close rivals, and perhaps that gave Carvana a great price to scoop up some downtrodden dealerships on the cheap. For instance, Carvana paid only $160 million for the first five stores, according to a regulatory filing.

However, with Carvana now primarily tying its new car sales to Stellantis brands, the company is indirectly betting that the global automaker can perform a strong turnaround that includes massive reinvestment in multiple brands, repairing not only dealership network issues but hiccups with suppliers, all while adjusting its product portfolio to favor fewer full-electric vehicles in the near term without losing sight of their investment long term.

Carvana's strategy doesn't need Stellantis to perform miracles to work, but for Stellantis investors, it's a nice small vote of confidence for its road ahead. That said, Stellantis has immense work to do on numerous challenges before investors, other than Carvana, start a position.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and Stellantis. The Motley Fool has a disclosure policy.