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    Carvana Co (CVNA)

    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.

    1. Retail Vehicle Sales - Sells used vehicles directly to customers through its online platform, offering a transparent and convenient purchasing experience.
    2. 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.
    3. 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.

    Q3 2024 Summary

    Initial Price$128.99July 1, 2024
    Final Price$175.80October 1, 2024
    Price Change$46.81
    % Change+36.29%

    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

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

    6. 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.

    7. 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.

    8. 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.

    9. 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.

    10. 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

    View all financials →
    Revenue by Segment - in Millions of USDQ1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Retail Vehicle Sales1,8271,9611,9491,7777,5142,1752,4112,543
    Wholesale Sales6187776104992,504657720786
    Other Revenues161230214148753229279326
    Total Revenue2,6062,9682,7732,42410,7713,0613,4103,655
    KPIs - Metric [Units]Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024
    Wholesale Units Sold [Units]35,11046,45340,886--44,15550,36856,487
    Wholesale Vehicle Gross Profit [$/Unit]1,253840685--1,0429531,080
    Wholesale Marketplace Units Sold [Units]213,764227,698221,368--242,647247,135234,361
    Retail Vehicle Unit Sales [Units]79,24076,53080,987--91,878101,440108,651
    Total Website Units [Units]41,00037,57034,090--30,69437,29945,974
    Total Gross Profit [$/Unit]4,3036,5205,952--6,4327,0497,427
    Retail Vehicle Gross Profit [$/Unit]1,3882,6662,692--3,0803,4213,497
    Number of Loans Originated [Millions $]1,428----1,8463,8886,051
    Capacity to Inspect/Recondition Vehicles [Units/Year]1.1M1.1M1.1M1.3M-1.3M1.35M1.35M

    Executive Team

    NamePositionStart DateShort Bio
    Ernest Garcia IIIPresident, CEO, and Chairman2012Co-founded Carvana in 2012 and has served as its President, CEO, and Chairman since its inception. Previously held roles at DriveTime Automotive Group, Inc. and RBS Greenwich Capital.
    Mark JenkinsChief Financial OfficerJuly 2014Has served as the CFO of Carvana since July 2014. Previously a professor at the Wharton School, University of Pennsylvania, and worked at the Brattle Group.
    Benjamin HustonChief Operating Officer2012Co-founded Carvana and has served as the COO since 2012. Previously co-founded Looterang and worked at Latham and Watkins LLP.
    Ryan KeetonChief Brand Officer2012Co-founded Carvana and has served as its Chief Brand Officer since 2012. Previously a principal at the Montero Group and Director of Strategic Marketing for George P. Johnson.
    Daniel GillChief Product OfficerMarch 2015Has served as the Chief Product Officer at Carvana since March 2015. Previously worked at Inflection and co-founded Huddler.
    Paul BreauxVice President, General Counsel, and SecretaryAugust 2015Has served as the VP, General Counsel, and Secretary of Carvana since August 2015. Previously practiced law at Andrews Kurth LLP.
    Tom TairaPresident, Special ProjectsOctober 2018Has served as President, Special Projects at Carvana since October 2018. Previously co-founded Propel AI, TrueCar, Inc., and Honk LLC, and worked at Toyota Motor Sales, U.S.A..

    Questions to Ask Management

    1. 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?

    2. 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?

    3. 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?

    4. 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?

    5. 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?

    Past Guidance

    Carvana (CVNA) Guidance in the Last Four Earnings Calls

    Earnings Call TitleIssued PeriodGuided PeriodGuidance
    Q4 2023 Earnings CallQ4 2023Q1 20241. Adjusted EBITDA: Expected to generate significantly above $100 million. <br>2. Retail Units Sold: Expected to be slightly up on a year-over-year basis.
    FY 20241. Retail Units Sold: Expected to grow year-over-year. <br>2. Adjusted EBITDA: Expected to grow year-over-year.
    Q1 2024 Earnings CallQ1 2024Q2 20241. Retail Units Sold: Sequential increase in year-over-year growth rate. <br>2. Adjusted EBITDA: Sequential increase. <br>3. No material one-time benefits or costs anticipated.
    FY 20241. Retail Units Sold: Expected to grow year-over-year. <br>2. Adjusted EBITDA: Expected to grow year-over-year.
    Q2 2024 Earnings CallQ2 2024Q3 20241. Retail Units Sold: Sequential increase expected compared to Q2, assuming a stable environment.
    FY 20241. Adjusted EBITDA: Expected to be $1 billion to $1.2 billion. <br>2. Seasonality Impact: Acknowledged seasonality effects in the second half of the year.
    Q3 2024 Earnings CallQ3 2024N/AThe documents do not contain information about the guidance provided in the Q3 2024 earnings call.