Carvana Co.
Analysis
Carvana is still growing at nearly 40% a quarter, and management says the only real limit is how fast it can build reconditioning capacity and inventory, not demand. Three straight quarters of falling profit per car show what it costs when that build slips. How much of the profit-per-car drop is lower rates versus recon costs?
- The thing limiting growth is the machine, not demand.
Demand is there at whatever speed they can scale. Where they added the most reconditioning capacity, inventory and sales both rose over 50%; where they added least, sales have since slowed. Recon capacity sets the growth rate. Which regions are next to get more reconditioning capacity?
- Profit per car has fallen for three straight quarters.
They handed customers roughly a point off loan rates and took a reconditioning cost spike in Q4. Full-year profit guidance implies a second half much like the first, so the value given back is not yet paid for by cheaper operations.
- The growth is now paid for out of profits.
Net debt is down to about a year of earnings and they crossed a $3 billion annual profit run rate, so the build no longer depends on outside money. That is what lets them keep handing value to customers while they scale. How much cash can go into new sites before growth slows?
- Inventory-driven conversion gainsThe bull case is that more cars in more markets lift conversion, which makes marketing cheaper and draws more buyers, so growth feeds on itself.
- Reconditioning capacity already builtBulls argue reconditioning is the real bottleneck, and that facilities and software already in place let volume scale without a matching rise in cost.
- Fixed cost leverage on overheadBecause much of the cost base does not grow with volume, each extra car sold should carry more profit, and management says that alone closes most of the margin gap.
- Profit per car is fallingBears note that profit per car has fallen for several quarters as savings from operations are handed back to customers faster than new ones are created.
- Inventory growth trailing salesCars available for sale have grown more slowly than sales, which management concedes limits conversion and so either slows growth or costs margin.
- Reconditioning execution riskReconditioning is where execution has slipped before, and bears argue that scaling it quickly raises cost and quality risk that lands in margins.
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|---|---|---|---|---|
Donald Trump Republican · Executive | Purchase | ≥$15K | Jul 23 | Sep 22 |
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How Carvana Co. turned $20.3B of revenue into $1.9B of operating income.
| Revenue | ||
|---|---|---|
| Used Vehicle Sales | $14.5B | ▲ 50.16% YoY |
| Product and Service, Other | $1.7B | ▲ 50.56% YoY |
| Total revenue | $20.3B | |
| Gross profit | $4.2B | 20.6% |
| Operating income | $1.9B | 9.3% |