Business Description
Carvana Co. (CVNA) is a leading e-commerce platform specializing in the buying and selling of used cars. The company provides a seamless, customer-centric experience by leveraging technology to offer vehicle research, financing, purchasing, and delivery services. Carvana also operates a proprietary logistics network and patented vending machines to enhance efficiency and brand recognition.
- Retail Vehicle Sales - Sells used vehicles directly to customers through its online platform, offering a transparent and convenient purchasing experience.
- Wholesale Sales and Revenues - Sells trade-ins and other vehicles acquired from customers that do not meet retail inventory standards, as well as revenue from its wholesale marketplace platform.
- Other Sales and Revenues - Includes gains from the sale of finance receivables and commissions on ancillary products such as vehicle service contracts (VSCs), GAP waiver coverage, and auto insurance.
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Q3 2024 Summary
What went well
- Carvana has significant infrastructure capacity to support substantial future growth with minimal additional capital expenditure, including reconditioning infrastructure for over 1 million retail units per year and physical real estate for over 3 million retail units per year, enabling efficient scaling.
- Carvana is achieving record gross profit per unit (GPU) and sees opportunities for further improvements across retail, wholesale, and other GPU segments through operational efficiencies and leveraging proprietary data and algorithms, enhancing profitability. ,
- Carvana is leveraging its unique customer sourcing capabilities, with a significant majority of vehicle acquisitions coming from customers, and is integrating its ADESA acquisition to deepen connections with commercial sellers, expanding its retail marketplace offering and providing new avenues for growth and supply chain efficiencies. ,
What went wrong
- Sustainability of High EBITDA Margins is Uncertain: Carvana acknowledged that their strong adjusted EBITDA margin of 11.7% in Q3 may not be sustainable due to seasonal factors. Used car demand is typically lowest in Q4, and they benefited from approximately $250 per unit of incremental other GPU from one-time factors in Q3, such as selling more loans than originated and favorable interest rate movements. These benefits may not recur, potentially leading to lower profitability in upcoming quarters.
- Inventory Levels are Below Optimal, Potentially Impacting Growth: The company admitted that their inventory levels are currently below their target and stated, "We would like for it to be higher." This suboptimal inventory could hinder their ability to meet customer demand and sustain accelerated growth, especially as they work to scale their operational chain to increase inventory.
- Sequential Increase in Operations Expense per Unit Indicates Cost Control Challenges: Operations expense per unit increased by $30 sequentially from Q2 to Q3. While described as a result of "a number of small items," this uptick may signal difficulties in maintaining operational efficiencies and controlling costs as the company grows.
Q&A Summary
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Q4 Margin Outlook and Seasonality
Q: Will EBITDA margins hold or grow from Q3 to Q4?
A: Margins may be impacted by seasonality in Q4, as used car demand is typically lowest and depreciation rates are highest during this period. We also benefited from approximately $250 per unit in other GPU tailwinds in Q3 that may not recur. -
ADESA Integration and Cost Savings
Q: How is the ADESA integration progressing and impacting costs?
A: The integration is going very well, unlocking reconditioning capabilities at ADESA sites with very limited CapEx by using existing infrastructure. We've reduced shipping distances by about 300 miles, lowering costs and reducing average delivery times by 25% year-over-year. -
Advertising Spend in Q4
Q: Why increase advertising in Q4 when demand exceeds supply?
A: We're investing in advertising to understand the levers that drive growth, with relatively small spend per unit. The fourth quarter traditionally has less demand, making it an optimal time to test and enhance marketing efficiency. -
Marketplace Economics and Accounting Impacts
Q: How does the marketplace affect economics and revenue reporting?
A: The retail marketplace allows us to sell cars on behalf of commercial sellers, but we don't record the gross sales price as revenue, affecting revenue recognition. We view it as a substitute for auction purchases, aiming for the same per-vehicle dollar economics. -
Other GPU Tailwinds and Future Expectations
Q: How should we model Other GPU going forward?
A: In Q3, Other GPU benefited by about $250 per unit from non-recurring items . We're constantly working on fundamental gains and see opportunities for more improvements over time. -
Inventory Levels and Marketing Impact
Q: How do current inventory levels affect marketing strategy?
A: We are starting to grow inventory but remain below our target levels. Inventory growth is an efficient marketing channel, enhancing conversion rates by offering customers more selection. -
Growth Plans and Scalability
Q: Can you handle rapid growth if the market normalizes?
A: We're more efficient than ever, making growth easier. We have the capacity to scale up to 3 million units per year, approximately 8x our current run rate. -
Operations Expense Per Unit
Q: Why did operations expense per unit tick up sequentially?
A: Operations expense per unit was down over $200 year-over-year but increased by around $30 sequentially due to minor items. We continue to see opportunities to drive this number down over time. -
Self-Sufficiency in Inventory Sourcing
Q: Is the marketplace key to sourcing more vehicles?
A: While the majority of our acquisitions still come from customers, the retail marketplace serves as a substitute for auction purchases and helps deepen relationships with commercial sellers. -
Customer Behavior with Increased Inventory
Q: Are new customers behaving differently as inventory grows?
A: As we grow inventory, we don't see meaningful differences in customer demographics or behavior. We're moving beyond early adopters, having sold 2 million cars and bought over 2 million from customers.
Key Metrics
Revenue by Segment - in Millions of USD | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Retail Vehicle Sales | 1,827 | 1,961 | 1,949 | 1,777 | 7,514 | 2,175 | 2,411 | 2,543 | ||||||||||||||||||||||||||||||
Wholesale Sales | 618 | 777 | 610 | 499 | 2,504 | 657 | 720 | 786 | ||||||||||||||||||||||||||||||
Other Revenues | 161 | 230 | 214 | 148 | 753 | 229 | 279 | 326 | ||||||||||||||||||||||||||||||
Total Revenue | 2,606 | 2,968 | 2,773 | 2,424 | 10,771 | 3,061 | 3,410 | 3,655 | ||||||||||||||||||||||||||||||
KPIs - Metric [Units] | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
Wholesale Units Sold [Units] | 35,110 | 46,453 | 40,886 | - | - | 44,155 | 50,368 | 56,487 | ||||||||||||||||||||||||||||||
Wholesale Vehicle Gross Profit [$/Unit] | 1,253 | 840 | 685 | - | - | 1,042 | 953 | 1,080 | ||||||||||||||||||||||||||||||
Wholesale Marketplace Units Sold [Units] | 213,764 | 227,698 | 221,368 | - | - | 242,647 | 247,135 | 234,361 | ||||||||||||||||||||||||||||||
Retail Vehicle Unit Sales [Units] | 79,240 | 76,530 | 80,987 | - | - | 91,878 | 101,440 | 108,651 | ||||||||||||||||||||||||||||||
Total Website Units [Units] | 41,000 | 37,570 | 34,090 | - | - | 30,694 | 37,299 | 45,974 | ||||||||||||||||||||||||||||||
Total Gross Profit [$/Unit] | 4,303 | 6,520 | 5,952 | - | - | 6,432 | 7,049 | 7,427 | ||||||||||||||||||||||||||||||
Retail Vehicle Gross Profit [$/Unit] | 1,388 | 2,666 | 2,692 | - | - | 3,080 | 3,421 | 3,497 | ||||||||||||||||||||||||||||||
Number of Loans Originated [Millions $] | 1,428 | - | - | - | - | 1,846 | 3,888 | 6,051 | ||||||||||||||||||||||||||||||
Capacity to Inspect/Recondition Vehicles [Units/Year] | 1.1M | 1.1M | 1.1M | 1.3M | - | 1.3M | 1.35M | 1.35M |
Executive Team
Questions to Ask Management
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Given that you've historically grown units from Q2 to Q3, but are expecting seasonality to impact unit growth now despite adding production capacity and hiring more technicians, can you explain why you're anticipating seasonality at this stage?
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With SG&A expenses remaining flat while retail units sold increased by 33% , how sustainable is this level of SG&A leverage as you continue to scale, especially considering you're carrying capacity for approximately 3x retail unit sales?
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Can you elaborate on the potential impact of credit tightening on your business going forward, and whether you anticipate making further adjustments to your credit policies in light of performance trends?
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As you plan to pass back value to customers from future fundamental gains, how do you intend to balance this with the need to drive profitability, and what specific areas are you targeting for these gains?
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Given that you're operating below your target available website inventory due to strong demand and limited production capacity , what are the specific gating factors preventing you from scaling production more rapidly to meet customer demand?