Buying a car in America is usually a hellish experience involving pushy salespeople, mysterious fees, and hours-long financing negotiations. That’s something Carvana aimed to solve with its online used car marketplace when it launched 13 years ago. In this episode, Devindra chats with Carvana Chief Product Officer Dan Gill about how the company moved beyond the flashy marketing of its early car vending machines, and how it’s still trying to perfect the online car buying experience. We also dive into some of the issues the company has faced – including delayed registrations and vehicle issues – and how it’s trying to learn from them.
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Credits
Hosts: Devindra Hardawar Guest: Dan Gill Producer: Ben Ellman Music: Dale North and Terrence O’Brien
To say that Carvana(NYSE: CVNA) shareholders have had a bumpy ride would be putting it lightly. The online used car retailer saw its shares skyrocket in the first four years after it hit the public markets in 2017, with the market cap reaching $31 billion in August 2021. But macroeconomic headwinds that started in 2022 crushed the business, and the automotive retail stock cratered. Through 2022 and 2023, the stock dropped 77%,
There’s a renewed sense of hope, though. Carvana stock soared 800% from Feb. 27, 2023, to Feb. 27, 2024, driven by upbeat financial results.
Is it time to buy this stock?
Looking at the latest numbers
On Feb. 22, Carvana reported revenue and unit volume of $2.4 billion (down 15% year over year) and 76,000 (down 13%) during the last three months of 2023. Both figures missed Wall Street estimates. And the company’s volume has now dipped in two consecutive years.
But Carvana impressed shareholders in another important area. The business has focused relentlessly on cutting costs, with fulll-year selling, general, and administrative expenses declining 34% in 2023. “Right-sizing” operations has been a focal point for the management team.
Efficiencies helped Carvana hit a financial milestone. It posted positive net income of $150 million in 2023, giving bullish investors plenty to cheer about. This was after the company reported a net loss of $2.9 billion in 2022.
Looking ahead, management expects retail unit volume to be higher in Q1 and for the full year of 2024 when compared to the same periods last year. Investors got excited.
Staring at a huge market
Carvana’s goal to completely disrupt the way people buy and sell cars hasn’t changed. Despite its volatile financial results in the past couple of years, the company’s addressable market remains massive. In the U.S., 36 million used cars were sold last year. The industry is also extremely fragmented.
A business that is able to improve the user experience can win over customers. With its emphasis on providing shoppers with a fast, convenient, and transparent way to buy and sell vehicles, Carvana stands out in this regard.
At the same time, the company has historically invested aggressively to build out its logistics footprint, and this hasn’t come cheaply, particularly when trying to create a vertically integrated organization. But understanding the expansionary runway, the leadership team wants to develop scale advantages, which justify the huge capital outlays.
It’s worth pointing out that at the end of 2023, Carvana was available in 316 markets across the country, the exact same number as 12 months prior. So in order for the leadership team to get the company’s financial position in a better place, it’s completely halted growth plans. Of course, this is not the right strategy for the business over the long term, as shareholders will start to demand that progress toward expansion is being made.
It will be important for investors to pay close attention to how executives strike the right balance between growth and profitability in the years ahead.
High risk, high reward
As of this writing, Carvana shares sit 78% below their all-time high from about 2 1/2 years ago. They trade at a price-to-sales ratio of 1.2, which is slightly above the historical average. This is after the stock has come roaring back.
However, don’t rush to scoop up the shares just yet as Carvana remains an extremely high-risk investment opportunity.
To its credit, the company is making notable progress bringing costs under control, but growth has completely stalled. This points to how sensitive Carvana is to macro factors. The current long-term debt burden of $5.5 billion also doesn’t help the situation. Investors always have to worry what direction the economy is headed in. If there’s a recession, the company would unquestionably be in trouble.
This stock has sizable upside, but the downside is too hard to ignore. And that’s why I’m not a buyer today.
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Carvana’s (NYSE: CVNA) journey from financial uncertainty to market recovery is a testament to the company’s strategic adaptation and operational resilience. Once faced with significant challenges, the company has executed a series of decisive moves to stabilize its position and chart a path toward sustainable growth. These strategic moves include cost-cutting measures and technological advancements that reflect Carvana’s response to immediate financial pressures and its commitment to long-term planning. As the company navigates through these changes, it showcases a compelling case of recovery, highlighting the importance of agility and foresight in today’s dynamic market landscape.
Carvana’s path to financial stability
In a market sector where operational stability and financial health are essential, Carvana’s journey over the past 18 months demonstrates a rigorous strategic overhaul to secure its market position and ensure its economic viability. The company, renowned for revolutionizing the car buying and selling experience through its digital platform, encountered formidable challenges that imperiled its business continuity and fiscal foundation. In response, Carvana embarked on a comprehensive cost-management program, a crucial element of which involved significant workforce reduction, eliminating $1.1 billion in annualized operational expenses.
Carvana’s dual-edged strategy
The strategic redirection also encompassed the deployment of “Carli,” an innovative software solution leveraging artificial intelligence to enhance the efficiency of the vehicle reconditioning process. This initiative marked a significant advancement in Carvana’s operational capabilities, enabling more streamlined workflows and reducing the time and resources required to prepare vehicles for sale. Implementing such technology not only signifies Carvana’s commitment to operational excellence but also underscores its foresight in harnessing digital innovations to drive business optimization.
Carvana’s economic resurgence
This comprehensive approach to financial restructuring and operational optimization yielded remarkable outcomes, most notably reflected in the substantial appreciation of Carvana’s stock price. From a valuation of $5, the company’s shares experienced a meteoric rise to $55, an indicator of the financial markets’ renewed confidence in Carvana’s business model and future prospects. This financial resurgence is a testament to Carvana’s strategic agility and ability to adapt to adverse conditions through decisive management actions and technological adoption.
The strategic measures undertaken by Carvana over this period not only stabilized the company during a phase of economic uncertainty but also positioned it for a trajectory of sustainable growth. Through financial discipline and innovative operational practices, Carvana has demonstrated resilience and adaptability, essential for thriving in the competitive and ever-evolving automotive marketplace.
Wall Street weighs in
The resurgence of Carvana has not gone unnoticed by Wall Street, with analysts closely monitoring the company’s trajectory. The sentiment, however, remains mixed. The majority of Carvana’s analysts have positioned their ratings towards a cautious “Hold,” with an average price target suggesting a modest discount to the current stock price. This consensus reflects an acknowledgment of Carvana’s efforts to stabilize and grow and underscores the challenges and uncertainties. Despite the skepticism, Carvana’s strategic moves to reduce debt and enhance operational efficiencies have painted a picture of a company on the mend, albeit with a long road still to navigate.
Financial footing and future prospects
As the company prepares for its next earnings announcement, the investment community’s eyes are fixed on Carvana’s financials. With expectations of an EPS improvement yet a forecasted revenue decline, the upcoming earnings report is anticipated to provide critical insights into Carvana’s fiscal health and strategic direction. The company’s financial outlook remains a blend of cautious optimism and realism, acknowledging the hurdles to achieving profitability in the short term while highlighting the potential for growth and stability in the long run. This balanced perspective is crucial for understanding Carvana’s position in a competitive and rapidly changing market.
Navigating challenges on the horizon
Carvana’s path to sustained growth is fraught with challenges. Despite efforts to reduce debt, the company’s substantial debt burden persists as a major apprehension that could potentially affect its financial adaptability. Operational efficiency, critical for maintaining growth momentum, requires continuous innovation, particularly in logistics and vehicle reconditioning processes. Additionally, corporate governance issues, particularly the control exerted by the Garcia family, have raised eyebrows and elicited legal scrutiny. The competitive landscape of the used car market, coupled with regulatory and economic headwinds, further complicates Carvana’s operational strategy. Addressing these challenges is paramount for Carvana to solidify its market position and ensure long-term viability.
Carvana at a crossroads
Carvana’s journey from the brink of financial distress to a position of strategic resilience is an example of corporate adaptation and perseverance. The company’s ability to pivot, streamline operations, and address financial vulnerabilities has set the stage for a potential market resurgence. However, the road ahead is complex, with financial, operational, and market challenges that require diligent management and strategic foresight. As Carvana navigates these challenges, its story serves as a compelling case study in the dynamics of the used car market and the broader themes of innovation and resilience in the face of adversity. For investors and market watchers, Carvana’s evolution offers valuable insights into the interplay between strategic decision-making and market performance in the digital age.
Carvana (NYSE:CVNA – Get Free Report) and Inchcape (OTCMKTS:INCPY – Get Free Report) are both retail/wholesale companies, but which is the better stock? We will contrast the two businesses based on the strength of their valuation, risk, earnings, institutional ownership, analyst recommendations, profitability and dividends.
Analyst Ratings
This is a summary of current recommendations and price targets for Carvana and Inchcape, as provided by MarketBeat.com.
Sell Ratings
Hold Ratings
Buy Ratings
Strong Buy Ratings
Rating Score
Carvana
5
15
1
0
1.81
Inchcape
0
0
1
0
3.00
Carvana currently has a consensus target price of $39.16, suggesting a potential downside of 3.07%. Given Carvana’s higher probable upside, equities analysts plainly believe Carvana is more favorable than Inchcape.
Earnings and Valuation
This table compares Carvana and Inchcape’s revenue, earnings per share and valuation.
Gross Revenue
Price/Sales Ratio
Net Income
Earnings Per Share
Price/Earnings Ratio
Carvana
$13.60 billion
0.56
-$1.59 billion
($12.34)
-3.27
Inchcape
N/A
N/A
N/A
N/A
N/A
Inchcape has lower revenue, but higher earnings than Carvana.
Institutional and Insider Ownership
51.1% of Carvana shares are owned by institutional investors. 17.1% of Carvana shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a stock is poised for long-term growth.
Profitability
This table compares Carvana and Inchcape’s net margins, return on equity and return on assets.
Carvana Co., together with its subsidiaries, operates an e-commerce platform for buying and selling used cars in the United States. Its platform allows customers to research and identify a vehicle; inspect it using company’s 360-degree vehicle imaging technology; obtain financing and warranty coverage; purchase the vehicle; and schedule delivery or pick-up from their desktop or mobile devices. The company was founded in 2012 and is based in Tempe, Arizona.
Inchcape plc operates as an automotive distributor and retailer. The company engages in the distribution, sales, and marketing of new and used cars, and parts. It also provides aftersales service and body shop repairs; and finance and insurance products and services. The company operates in the Asia Pacific, the United Kingdom, rest of Europe, the Americas, and Africa. Inchcape plc was founded in 1847 and is headquartered in London, the United Kingdom.
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Inchcape plc operates as an automotive distributor and retailer. The company engages in the distribution, sales, and marketing of new and used cars, and parts. It also provides aftersales service and body shop repairs; and finance and insurance products and services. The company operates in the Asia Pacific, the United Kingdom, rest of Europe, the Americas, and Africa. Inchcape plc was founded in 1847 and is headquartered in London, the United Kingdom.