- And all of us will stop at nothing to drive you happy.
- [Advertiser] We'll drive you happy at Carvana.
- [Narrator] You might recognize these commercials
for Carvana.
The online car dealer that delivers cars to your home
or sends them to one of their vending machines
spread across the country.
The company says it wants to change the way we buy cars.
And in 2021, investors took notice.
It's revenue had more than doubled from the previous year,
and its stock value skyrocketed by over 1,000%,
from a low point in 2020.
- I think Carvana is a perfect example of a stock
that had everything go right for it
during the first part of the pandemic, and subsequently,
seems to have almost everything going wrong.
- [Narrator] The company share price
started to fall in late 2021.
Plummeting by 95% over several months.
And the things that had once driven Carvana's growth
were now signaling trouble to investors.
So, what went wrong?
Carvana has never actually posted
an annual profit,
instead focusing on growth.
- Carvana, put money into hiring.
Into new reconditioning centers,
to fix up the cars that they buy and sell them again.
Carvana's put a lot of money into marketing
including the big Super Bowl ads and things like.
- Did I tell you I bought our car from Carvana.
- But also the car vending machines.
They spend a lot of money,
and they have always spent a lot of money.
And they don't make a lot of money.
- [Narrator] The company grew steadily
and went public in 2017.
But it was in 2020 amid the pandemic,
when the share price really took off.
In February 2021, CEO, Ernie Garcia,
talked to CNBC about Carvana's growth.
- I think what COVID did is it shifted psychology faster
in the direction of trying new things.
And so I do think that the business probably has
more demands today than it would've had absent COVID.
- [Narrator] As demand increased,
three main things were helping fuel growth for the company.
One was its method for accounting for car loans.
Like other auto dealers, Carvana offers customers loans
to buy their cars,
and sells the debt to investors,
who buy bonds of the claim on customer loan payments.
This is a process called securitization.
But unlike others, Carvana off-loads its loans
from its balance-sheet,
to make a gain up front,
rather than making a gain over time.
Low interest rates at the time
helped make the loans appealing to those investors,
who had a higher risk appetite
and were more comfortable with consumer credit.
In 2021, Carvana made 37% of the company's gross profit
from gains on loan sales.
The second thing fueling growth,
was the rising cost of used cars.
A global chip shortage, restricted production of new cars,
sending up the cost of used ones.
This benefited dealers across the market.
And the third, was its online low contact model.
Which allowed cars to be bought and sold across states.
- The process that Carvana promises
is appealing to a lot of people.
You don't have any sales people,
you know what your price is,
you know that you have financing going in.
Like it's kind of like, a one click,
you know you can buy a car from your living room.
- [Narrator] Carvana's platform was ideal
for a social distancing world.
And its stock followed the trend
of other virtually focused companies.
- They were, you know, really thriving during the pandemic.
Stock was on a steady upward trajectory.
And then the wind changed direction.
- [Narrator] After the peak in August,
share value started to slip.
Spikes in COVID cases, supply chain issues
and rising inflation began to spook investors.
- I think it started with
kind of a broader growth stock pullback.
They were like other companies that struggled
with the pandemic high expectations
like Peloton and Netflix.
- [Narrator] In February, the company announced
that it would acquire used car auction business,
Adesa US for 2.2 billion,
to expand their physical locations
for inspecting and reconditioning cars.
But in April, the company announced their first ever decline
in quarterly sales.
And share value dropped.
- With Carvana, you know they had this growing demand,
and they raced to meet this demand.
And they grew, they grew, they grew.
And then all of a sudden, you know the tide kind of turns.
Demand isn't there for whatever reason,
or isn't there to the level that they expected.
And now investors are looking, you know,
kind of at the nitty gritty of the business,
'cause it seems like growth isn't gonna be the story.
- [Narrator] The tailwinds that had contributed
to Carvana's growth and boost in stock,
were now becoming headwinds.
Demand was cooling for their securitizations.
Fears grew that rising inflation and a potential recession
would make it harder for car buyers to pay back their loans.
Investors' appetite for growth stocks
and consumer credit, declined.
Used car prices were also becoming
too high for many buyers.
Carvana said the average price for their cars
increased by more than 30% from January 2021,
to January 2022.
And Carvana was dealing with logistical problems
associated with the growth and demand.
Complaints about the company were growing.
- So Carvana customers started reporting
having issues with getting the titles to their cars,
getting the paperwork in time,
being provided with temporary license plates
from states that they didn't live in.
And those stories became more and more common
in the second half of last year.
- [Narrator] In November, Carvana said it was addressing
significant operational constraints,
due to its record growth and labor shortages due to COVID.
However, many of these issues carried over into 2022.
By May, Carvana's share price hovered near a low point.
The company announced that it would lay off
roughly 12% of its workers,
after borrowing heavily to acquire Adesa.
In July, Illinois moved to suspend Carvana in the state
after complaints about titles and registration.
The state previously set strict guidelines for the company
around issuing temporary registration and license plates.
Carvana was granted a temporary restraining order
to continue selling cars in the state at the end of July.
Of the suspension, a Carvana spokesperson said,
"We provide title and registration services at a rate
among the top performing dealers in the state.
Carvana shares of the state's commitment to reducing
paperwork challenges as much as possible."
So where does Carvana go from here?
Quarter 2 earnings in August
showed an improvement in retail unit sales.
The company said it is focusing
on cutting costs and improving efficiency.
It also said it expects in the third quarter
to sell its loans to financial institutions
instead of packaging them into securities.
Its share price increased by more than 40%,
the morning following the announcement.
Carvana's path ahead may depend on how it continues
to handle growth moving forward.
- Well, when companies focus so exclusively on growth,
they can, you know,
generate all sorts of demand for their product
that they then, maybe struggle to meet that demand.
And then by the time they catch up,
you know the macro environment
and the demand for their product for whatever reason,
whether it's used car prices
or supply chain issues or whatever,
all these kind of weird issues
that affected Carvana's business.
They were overbuilt for what showed up.
- [Narrator] A Carvana spokesperson said,
"That the company remains firmly committed to continuous
improvement and will stay hard at work making
the best car buying and selling experience available
even better."
Here's CEO, Ernie Garcia,
in a quarter 2 call to shareholders.
- [Ernie Garcia] You're reducing the speed
at which we're growing today
given the shift in focus.
But our hope and belief is that by getting more efficient
it makes it easier to grow faster in the future because,
you have kind of less work to do per sale.
And so, you know, we'll hope to get that back over time,
at some point.
- [Narrator] The auto industry as a whole
has been impacted by changing market conditions.
But the share price for some competitors, like CarMax,
have not been as severely affected as Carvana.
(gentle music)