Not all that long ago, it seemed that Carvana was
unstoppable.
When you see Carvana, you've got nirvana.
That's what this market's about, is finding the next
Carvana!
Carvana benefiting from the strong used car market.
In its most recent quarter, total gross profit was up
145%.
But as with many onetime Wall Street darlings, the
excitement around the online used vehicle retailer
did not last long.
This one is just a total house of pain!
House of pain!
Shares of Carvana plunging for a second day, dropping
to its lowest price on record.
When the pandemic hit, all of the dealerships shut down
in many states and no one really knew what was going
to happen. Everyone viewed Carvana as this stock that
was going to skyrocket and, to a certain extent, it did.
In August 2021, the stock hit $370 and Carvana was on
top of the world. Since that peak, I mean, Carvana
has just collapsed and for investors it has been
anything but nirvana for the Carvana stock.
Carvana began as a subsidiary of DriveTime
Automotive Group, a traditional used car
dealership owned by Carvana CEO Ernie Garcia III's
father. Garcia began working at his father's
company shortly after graduating from Stanford in
2005. Seeing firsthand some of the pain points of the
traditional car buying experience, Garcia, along
with two other founders, decided to spin Carvana off
into a separate business in 2012.
In March of 2013, the company launched in its
first market, Atlanta.
Here's Garcia talking about the company's early days
last year.
You know, when we started Carvana, the goal was how do
we use modern technology and build a different kind
of business that gives customers the simple
experiences they're looking for with low prices and
great selection. If you go to Carvana, you're going to
see tens of thousands of cars versus if you go to a
dealership, you might see 50 or 100 cars.
So next you're going to see a price that is about $1,000
less when you take into account dock fees and
everything else than you would likely pay at a
dealership.
In addition to finding, touring and buying a used
car completely online, Carvana gives customers the
option to get financing and sign up for additional
warranties with the click of a button.
Customers then get the option of having their newly
purchased car delivered to them, or picking it up from
one of the company's 33 fully-automated car vending
machines. If they're not happy with their purchase,
customers can return their vehicles within seven days
and get their money back. Users can also sell or trade
in their own vehicles, which they can leave at one
of Carvana's vending machines or get picked up
directly from their homes.
But the convenience for the customer comes at the price
of making operations more complicated for Carvana.
Once you sell a car to them, they have to then flip that
car. They've got to make it sellable.
They have to go through inspections. They have to do
the recalls, if there are any recalls.
And there's a lot more to the process than people
think. And it can be extremely costly.
When you think about the logistics of, let's say,
going to pick up a car in Maine and selling it to
someone in California.
On April 28th, 2017, Carvana became a public company.
The event was somewhat lackluster, with Carvana
stock tanking 14% at the end of its first day of
trading.
When Carvana went public, there was a lot of hype
around the company.
It actually kind of reminded me a lot of the EV
startups that we saw in recent years where they were
going to come in and just tear apart the entire new
vehicle used vehicle franchise system or the auto
industry. But what we saw was it took a little bit
more than some people thought to kind of break
into the used car market.
Still, Carvana did seem to eventually find its footing.
Over the last few years, the company has been
steadily climbing the list of top used car retailers.
The ranking is put together by trade publication
Automotive News and tracks companies by volume of
vehicles sold every year.
In 2018, Carvana entered the top ten list for the
first time, having sold over 94,000 vehicles.
Since 2019, Carvana has quickly moved up the ranks,
with the latest data showing that Carvana sold
over 425,000 vehicles in 2021, giving the company its
number two spot after used car behemoth, CarMax.
Last year, Carvana hit another milestone, becoming
one of the youngest companies to make the
Fortune 500 list just nine years after it was founded.
Such a feat has only been achieved by the likes of
Google and Amazon, both of which made the list eight
years after they were founded. By late summer
2021, Carvana CEO was in a celebratory mood after the
company hit its first profitable quarter.
If you don't mind, I want to take a moment to take a
victory lap and say this is our first positive quarter
and to thank all the people of Carvana that have worked
so hard over the last eight years to make that possible.
Eight years ago, we launched, we sold a couple
of hundred cars and this quarter we sold over 100,000
cars. And this year we'll sell 1,000 times as many
cars as we sold that first year.
By January 2022, Carvana celebrated selling its
millionth car. Experts attribute Carvana's success
to a perfect storm of factors that acted in its
favor early on in the Covid 19 pandemic.
Supply chain problems choked the production of new
vehicles, social distancing measures made Carvana's
online only car buying experience desirable,
government stimulus programs gave customers
extra cash to spend and rock bottom interest rates
encouraged them to do just that.
But the same sky-high demand that made Carvana a
Wall Street star would also bring it down.
What ended up happening was the demand was too great for
the company. It couldn't even keep up with the demand
of vehicles that were coming into the company to
then go out and sell.
It was buying a record amount of vehicles heading
into this year and they were at record high prices
because that's just where the industry was.
So Carvana built up its inventory at the peak of the
pricing, not expecting that demand to fall.
In an effort to get more inventory, accelerate the
inspection and processing of its used vehicles and
expand its footprint, Carvana purchased Adesa's
U.S. auction business earlier this year.
The $2.2 billion all-cash deal gave Carvana a number
of new employees and 56 physical locations that the
company could use to recondition its cars before
sending them off to customers. But it also
saddled Carvana with a ton of debt.
And many saw the acquisition as ill-timed.
For Carvana buying Adesa in 2022 at the same time that
their stock price was going down, maybe their sales were
slowing was probably not the best idea at this
particular point in time.
In a December note to investors, Wedbush analysts
went as far as to say that Adesa was, 'an albatross'
around Carvana's neck.
But Carvana co-founder Ryan Keaton says there are no
regrets.
In terms of our long term outlook and where we want to
be for the business, the Adesa acquisition was was a
great one for us. It helps when we buy cars from
customers. We're able to transport that to now these
Adesa locations, where in the past, we had to take
them a little bit further or in the past we would have
to spend money to a third party to be able to do that.
It also enables consumers to get the car much more
quickly.
Even before the Adesa acquisition, Carvana's
troubles were beginning to mount.
There's been issues with state regulators over the
years for things like failing to deliver titles to
the MVA and selling cars without state inspections.
How is Carvana addressing these problems and are you
beyond it at this point?
We're working really closely with all the relevant
parties to to answer the questions and to remedy any
kind of concerns that that may exist.
Sure, there are always going to be things that kind
of happen, whether like a title registration is late
or whatever else there too. I think we're not perfect.
And and I think the industry is not perfect, but
it's just what we're trying to do is and certainly
improve there.
Then there is falling demand.
Data from Cox Automotive shows that total used
vehicle sales fell to about 2.8 million cars in October
2022, down about 15% from the same time last year.
Used car prices are also starting to normalize after
an explosive growth in 2021.
They overbuilt for demand that never came and that was
following not being prepared enough for the
demand that was there. So they really missed their
chance of, I mean, capitalizing on the
coronavirus pandemic.
All these factors came to a head in Carvana's Q3 2022
earnings report, which showed almost every aspect
of the car resellers business declining.
It's less affordable for people to buy a used car
right now, whether that's the high prices which remain
elevated, even though they've come down a little
bit, then the higher interest rates.
But the real issue for Carvana, the debt load and
whether or not this is a company that A, can get back
to profitability and then B, has a runway to pay off
the debt.
On November 30th, Bank of America downgraded Carvana
to neutral, saying that without a cash infusion,
Carvana is likely to run out of cash by 2023.
By early December, Carvana stock plummeted by about 97%
from its all time intraday high of $376.83 per share on
August 10, 2021.
The company's market cap was also down from $60
billion during its peak last year to about $723
million. Still, some analysts do believe that
there is a way forward for Carvana.
In a December note to investors, Morgan Stanley
said, 'we remain believers in the potential for Carvana
to revolutionize the dealer business model and believe
it has the best digitally enabled proverbial mousetrap
in the business.' To do this, the note went on to
say, Carvana would need a significant injection of
capital. The note came after Morgan Stanley pulled
its rating of Carvana in early November.
But getting this new injection of capital may be
tough.
I think it's possible for Carvana to recover, but I
think that they will have to perhaps scale back some
of their growth aspirations. One of the
things, you know, traditionally with startup
companies that has fueled their market valuations is
their potential for growth.
And for a company like Carvana, there isn't really
that opportunity for unlimited growth.
Just this year, Carvana announced two rounds of
layoffs.
We're shifting to be kind of more efficient and we're
making really good progress there.
And ultimately, you know, we have a plan that we're
working with a singular mindset to try to like
really kind of get to profitability as quickly as
possible, to reduce our expenses and get to EBITDA
positive. At Q3, we had $2 billion of committed
liquidity resources and also an additional $2
billion of other liquidity resources.
So we have plenty of liquidity to go to execute
that plan.
Carvana is also increasingly facing greater competition.
Aside from online used car retailers like Vroom and
Shift, more mainstream players were also forced to
enter the market during the pandemic.
Autonation hopped into this realm quite heavily.
You've got Lithia that's in this realm and you've got
traditional franchised dealers that were forced to
change and sell vehicles online, and they have an
advantage of having a traditional brick and mortar
that's local to customers that can attract vehicles
coming into them. So I mean, Carvana's model went
from this unique ground breaking plan to disrupt the
industry, which they did.
But the industry caught up a lot quicker than I think
they thought.
Even Ford has said it plans to sell all of its future
EVs online. CEO, Jim Farley, explained the
reasoning for this decision at an investor conference
earlier this year, saying that Ford's current
advertising and distribution costs per car
were about $2,000 more than Tesla's, which sells its
cars directly to consumers.
But Keaton says there's room for everyone.
Automotive retail is a is a very unique industry.
It's so, so highly fragmented.
I think the market leader has something like a 2% to
3% market share of that whole industry.
It's very different than saying like, hey, it's $100
million industry, of which the two leading companies
have like a 60% market share where you're really
battling it out.
Among rising interest rates, fears of a recession and a
supply chain that's allowing the production of
more new vehicles, the future of used car retailers
like Carvana seems precarious. But Keaton says,
the key for the company right now is to remain laser
focused.
Where do you see Carvana in five years?
In all honesty, I think we're focusing kind of like
what's in front of us right now. It's nice to be able to
to think about, but I think it's just a distraction from
from what we need to do right now and our mission
moving forward.