Carvana comes down to earth

The big Carvana rally now looks more like a dot on the radar.

Shares of the online car retailer soared on Thursday, closing 56% from the previous day after announcing that it expects to post adjusted EBITDA of $50 million in the current quarter, thanks to higher profitability of sales per car.

For Carvana, the gains were a welcome turnaround. The company, which once had stock prices as high as $360 in 2021, had seen a steady decline into mid-single digits. However, despite surpassing $25 per share on Thursday following its earnings update, shares of Carvana closed at $19.07 today, erasing much of its recent gains.

what changed

Carvana’s debt and revenue slump, along with a cold reaction from industry analysts, eclipsed the company’s sunny earnings forecast. There were also concerns that the company’s adjusted profitability result was a one-time affair.

Other comments echoed what TechCrunch wrote yesterday: Carvana’s increased profitability was due to lower revenue. Based on current numbers, Wall Street analysts expect Carvana to report revenue of $2.57 billion in the second quarter and $2.63 billion in the third quarter. Those numbers compare poorly when placed next to second and third quarter 2022 revenue results of $3.88 billion and $3.39 billion, respectively.

Carvana is a deeply leveraged company, with long-term debt of over $6.5 billion at the end of the first quarter. With gross profit of a few hundred million per quarter on the current account and negative operating cash flow of $66 million in the first quarter of 2023, the company has a tough road ahead of it.

A little history

Carvana was launched in 2013, calling itself the “first comprehensive online automotive retailer”. At the time, co-founder Ernie Garcia III said the company had reduced the physical overhead associated with traditional dealerships, replacing them with “user-friendly technology” and providing 360-degree interior and exterior views of its inventory.

Carvana embraced physical retail spaces in 2015, albeit in a new way, via multi-storey “car vending machines”. In the years that followed, Carvana secured billions in equity and debt financing, and bought a few startups, namely Car360 and Adesa. Through it all, the company has yet to see any real profit.

Certainly, better profitability per sale and improved adjusted earnings for the second quarter are welcome, as evidenced by the initial reaction of investors yesterday. However, it is unclear whether Carvana’s long-term trajectory has changed enough to warrant repricing of the entire fabric. Cooler, or more cynical, heads seem to have prevailed today.

Still, Carvana, at around $19 a share, is worth almost a third more than it was before its latest news. It’s a win for the company, no matter how you slice it.