To The Moon

Summary

• Carvana has rebounded from near-bankruptcy to profitability, but its current valuation is highly inflated and difficult to justify.

• CVNA's recent success is driven by aggressive cost-cutting, debt restructuring, and a surge in retail units sold.

• The company faces significant risks, such as looming debt obligations that could strain future cash flows.

• Despite operational improvements, I rate CVNA as a sell due to unresolved financial concerns and an unsustainable premium valuation compared to peers.

Introduction

Back in 2022, when Carvana was rumored to go bankrupt, I remember shorting the stock all the way to $3 a share, closing it, and never looking back. And I was surely astonished to see the company back to almost $400 a share, considering all the setbacks and difficulties the company had and still has, in my opinion.

Carvana (NYSE:CVNA) has become a well-known online car retailer that is remembered for its flamboyant marketing, such as its car vending machines, offering a unique customer experience. Other offerings include a 7-day money-back guarantee, allowing buyers to test their vehicle in their daily lives. This has made Carvana a darling on Wall Street during the COVID pandemic, and it all crashed down in 2022 with a rumored bankruptcy until it restructured its debt and rose back from the proverbial ashes.

Operation Overview

Carvana is an innovator in the automotive industry, that’s for sure, with its vertically integrated model encompassing both retail and wholesale.

The Net Retail side is the primary business for Carvana, with a customer-centric online car experience. It consists of the online platform, the financing and trade-in aspect, which is a great integration to the business model, as well as the delivery and pickup, which has been the part that got a lot of customers talking (friends that live in Texas told me how great the experience was to grab a car in the giant vending machine). And though, yes, that’s a gimmick, it gave the company a marketing edge over competitors deemed “boring”. The segment generated $11.48B in overall sales for the past twelve months.

Wholesale is the segment that is basically the best opportunity to liquidate vehicles that are not made for the direct retail channel. The operation is resumed through inventory sourcing, mainly from trade-ins from retail customers and the Carvana ACCESS platform, which operates as a direct-purchase online auction house, allowing independent and franchised dealers to bid on vehicles. Carvana can also go through a physical auction. It has grown a lot in parallel to the retail side and has generated $3.35B in total sales over the past twelve months.

Current Dynamics

I’ll go back in time, back in 2022, when the tide dropped and we saw who was swimming naked. Carvana experienced a 98% drop from its 2021 highs due to a slew of headwinds. First, the used car market, and the broader market, grappled with soaring inflation and rising interest rates, which translated into increasing costs for vehicle financing, dampening consumer demand. Furthermore, the pandemic-era savings that fueled the initial surge in used car sales, pushing prices higher for Carvana, started to dwindle. Now all of this came at the possible worst time, as the company was grappling with an aggressive growth strategy, which largely prioritized expansion over profitability, making the company even more vulnerable to an economic downturn, as the balance sheet was far from healthy. The ADESA acquisition, which at the time was the second-largest wholesale automobile auction house in the United States, was a strategic misstep, as CVNA bought it at the height of the cycle with a lot of debt based on the fact that the rapid growth of the pandemic era would continue and thus left the company with a massive excess in inventory and a bloated cost structure.

Investors began to lose confidence, with many questioning the company’s solvency. Carvana got a break from its creditors, who offered a comprehensive debt restructuring in 2023, pushing back all threat of near-term debt payments, which could have put the company underwater. $350MM of equity was further infused to shore up the balance sheet. On the operational side, CVNA made major expense cuts, such as a significant reduction in marketing expenses, and it integrated ADESA, which has been driving sales growth over the past couple of years.

What pushed the company’s stock back to new heights was the return to profitability in 2024, with the company seeing positive net income in the past 6 quarters. Also, the surge in revenue per unit sold has drastically increased on the back of the cost-cutting measures, as well as the appetite of current consumers. The debt restructuring also allowed CVNA to increase its operational cash flow, thus further stabilizing the company. And for sure I’m glad that I escaped my short at the right time.

After all of this history, I want to focus on today and whether the company can warrant such a high valuation. Looking at the most recent quarter, there have been a lot of positives, to be fair, with the company seeing a strong 41% Y/Y increase in retail units sold at 143,280. Net income came in at a strong $308MM, leading CVNA to continue to have a rosier outlook for the remainder of the year, with an FY EBITDA expected to come in between $2B and $2.2B.

Valuation

Carvana’s valuation is currently ludicrous, and it is again a company like Palantir and Tesla that cannot justify such high levels. It currently has a P/E GAAP of 84.24, close to 7 times the P/E of AutoNation and CarMax. Carvana also has an EV/EBITDA of 28.47, akin to a high-tech company. Carvana has turned FCF positive, yes, but the heightened valuation translates into a dismal 1.3% FCF yield. Carvana is maybe the most innovative car seller in terms of technology as well as marketing, but I do not believe that this commands such a large premium over more established competitors.

Valuation metrics

Looking at growth, it has been dismal over the past 3 years as it had to cope with the difficulties in 2022. Though it came back in 2024, for the last twelve months, it posted 26.9% and 39.5% Y/Y growth in revenue, while the company came back to profitability as well following the 2022 loss of $1.59B. Looking ahead, as I mentioned earlier, the company is expecting rosier days ahead as the company can capture a large share of the fragmented used car market. And while it is operationally leaner and more integrated, there is still the massive debt question with PIK interests, which allowed the company to preserve cash flow in the short term but now increases the total principal that will need to be paid, and cash interest payments will fully strain cash flows in the near term.

Growth Metrics

Carvana has relatively strong gross margins compared to its most direct peers at 21.89%, thanks to the cost-cutting measures, and has been able to grow its gross margin from 9.2% back in 2022. The same trend can be seen with its net profit margin, although it only stands at 3.46% for the time being. Now the company has been posting record net income, but that’s on the back of current financial engineering, providing great cash flows that are set to end soon.

Margin Metrics

Return Metrics

Conclusion

There are still issues with the growth outlook for the company, and its current valuation is ludicrous, despite some positive, short-term numbers that are thanks to financial engineering. At the end of the day, it is still a company that sells cars and that is valued like it were the next big thing in tech, despite having only gimmicky marketing advantages. I rate Carvana as a sell.

$Carvana Co.(CVNA)$ $CarMax(KMX)$ $Vroom, Inc.(VRM)$ $Lithia Motors(LAD)$ $Burlington(BURL)$