To The Moon

As of May 2022, the flagship fund from Tiger Global (TG) fund has retraced 52%.  In addition to TG's primary market investment losses, the investment in Carvana (an used car dealer) is the largest loss in secondary market. The stock has retraced more than 94% from its highs over the past 11 months, with the stock price retreating from $350 to $21.25 as well as the company's market cap falling from $62 billion to $3.8 billion. Carvana is probably the worst performer in terms of stock price amidst the gradual cooling of US consumption and interest rate hikes.

The chart below shows TG's position in Carvana. As the stock price retreats, TG continuously adds the position, leading to the enlargement of losses. If TG still doesn’t reduce its position in Q2 this year, their  losses of this investment is close to $1 billion.

1.  Why Does TG Favor Carvana?

Carvana is an online used car dealer in the U.S.. It is the highlight because cars-selling relies mainly on 4S stores in the U.S. This company not only sells used cars, but also packages buyers' loans and sells them to bond investors. In 2021, the revenue from the sale of loans represents 1/3 in the company's gross profit.

In the past two years, the business mode in Carvana could benefit from both sides- car buyers and bond investors, with overall used car prices climbing in the U.S. as well as low Fed interest rates (interest income from selling vehicle loans is objective). This should also be the reason why TG is bullish on this company. Although the company has been losing money, but the stock price has been touted all the time.

2. Carvana’s Problem

As the macro environment has turned with interest rates hiking as well as US consumption cooling, the business outlook for the company is uncertain.

The three charts below show the number of car sales, the number of employees and the number of cars sales per capita for this company over the past few years. As the number of car sales is doubling, the number of employees is doubling too, leading the decline of the number of car sales per capita. From this point, the company may be more efficient than 4S stores, but it does not have the scale effect of "online".

Of course this issue is not the most important because the decline of efficiency is common with the enlargement of scale. The major problem is the business model in the company.

Generally speaking, the business model from a company is alarming for providing both the commodities and the money to buy it. Another risk for Carvana is that there may be no buyers for the loan products, leading to the loan staying in its own hands, which is the main reason to drive the stock price down recently.

In addition to this potential damage on the balance sheet, the company has hoarded more than 70,000 vehicles at the end of 2021, which is double the number at the end of 2020. The company is still gambling that the used car market will definitely continue to be booming. Currently, the price of used car sales is retreating. The chart below shows the U.S. used car price index.

Conclusion

Under the current macro environment, it’s not the time to pronounce a death sentence on Carvana. The company still has time to get rid of the loans on hand, reducing its inventory and decreasing the number of employees (the company has already announced 2,100 layoffs, which is 12% of the total workforce). However, from the perspective of growth stock, the future is murky.

Therefore, Investors should be careful of The Business Model Canvas ( The right side of the BMC focuses on the customer (external), while, the left side of the canvas focuses on the business (internal), which is greatly affected be macro economy. For instance, even if iPhone’s sales are sound, Apple does not lend money to consumers to buy Apple’s products, only relying on third-party banks (Citizens Bank) to take the risk. We are suggested to be cautious.

$Carvana Co.(CVNA)$