Carvana share price rockets upward 800% in 5 months
I am the Carvana (CVNA) investor, who first brought this high growth company to the attention of this board back on 11/26/18 in my post, CVNA TWLO top price & revenue gainers.
Thereafter, I posted the following quarterly and annual results:
2/28/19 CVNA Q4/FY 18 triple digit gains continue
5/9/19 Carvana Q1’19 revenues up 110% YoY
5/22/19 My ongoing case FOR Carvana
8/8/19 Carvana Q2 revenue up 108% price up 25%
11/17/19 CVNA Q3 revenue up 105%, shares up 149% YTD
Referring to the following Big Chart that shows Carvana’s share price over the recent past 52-week period [ https://bigcharts.marketwatch.com/advchart/frames/frames.asp… ], after reaching a share price high of $115.23 on 2/20/2020, CVNA along with many other companies began an alarming steep inexplicable downward trend to a 52-week low share price of $22.16 on 3/16/2020 - an 80.7% drop! I began selling most of my CVNA holdings after the stock price dropped more than 25%, i.e., around $87 and lower/share. After evaluating and deciding that this major pullback of CVNA share price presented a huge buying opportunity at share prices in the 20s, over a 4-day trading period (3/18-23/2020) I began focusing on accumulating as many as possible CVNA shares using cash-on-hand and confirmed proceeds from sales of other stockholdings in my family’s IRA accounts.
Soon after, as shown in the Big Chart, the CVNA share price bounced back, closing at $91.15 on 5/6/2020, when after hours CVNA reported the following Q1 2020 results:
5/5/20 LETTER TO SHAREHOLDERS Q1 2020
Q1 2020 Financial Results:
• Retail units sold totaled 52,427, an increase of 43%
• Revenue totaled $1.098 billion, an increase of 45%
• Total gross profit was $138.4 million, an increase of 56%
• Total gross profit per unit was $2,640, an increase of $232
• Net loss was $183.6 million, an increase of 122%
• EBITDA margin was (12.6%), a decrease from (7.8%)
(Includes (2.4%) impact from non-cash adjustments to asset carrying values related to
• GAAP basic and diluted net loss per Class A share was $1.19 based on 50.4 million shares of Class A common stock outstanding
• Adjusted net loss per Class A share, a non-GAAP measure, was $1.18, based on 155.6 million adjusted shares of Class A common stock outstanding, assuming the exchange of all outstanding LLC Units for shares of Class A common stock
When comparing Q1 2020 financials with other quarterly performance and trends, the impact of the Corona virus on CVNA operations and financials seems quite apparent in the following:
**7-YEAR SUMMARY OF CVNA CORPORATE FINANCIALS** **MARKET NO. USED WHOLESALE NET Diluted SHARE** **CARVANA CAP OF VEHICLE Change VEHICLE Change REVENUE Change INCOME EPS PRICE Change** **FY/QTR ($M) MKTS UNITS SOLD YoY UNITS SOLD YoY ($M) YoY ($M) ($) ($) YoY** Q2 '20 20.51 B 261 55,098 25.2% 7,277 (32.3)% 1,118.334 13.4% (106.326) (0.62) 120.20 92.0% Q1 ‘20 8.37 B 161 52,427 42.6% 10,754 60.5% 1,098.216 45.4% (183.557) (1.19) 55.09 31.7% **FY 2019 13.97 B 146 177,549 88.7% 39,895 163.8% 3,939.896 101.5% (114.659) (2.45) 92.05 181.4%** Q4 ‘19 13.97 B 146 50,370 81.5% 10,740 127.7% 1,103.588 88.7% (125.740) (0.82) 92.05 181.4% Q3 '19 9.976 B 146 46,413 83.3% 11,698 165.4% 1,094.854 104.7% ( 92.244) (0.60) 66.00 70.3% Q2 '19 9.45 B 137 44,000 94.9% 10,756 194.0% 986.221 107.5% (64.059) (0.44) 62.59 50.5% Q1 '19 10.88 B 109 36,766 99.1% 6,701 186.1% 755.234 109.6% (82.596) (0.56) 41.82 82.4% **FY 2018 4.712 B 85 94,108 112.7% 15,125 132.4% 1,955.467 127.7% (55.476) (0.58) 32.71 71.1%** Q4 '18 4.712 B 85 27,750 105.3% 4,717 155.8% 584.838 120.6% (86.404) (0.58) 32.71 71.1% Q3 '18 5.428 B 78 25,324 116.1% 4,408 145.3% 534.921 137.3% (64.419) (0.50) 38.75 164.0% Q2 '18 5.818 B 65 22,570 111.3% 3,658 131.5% 475.286 127.0% (51.250) (0.41) 41.60 103.2% Q1 '18 3.003 B 56 18,464 121.6% 2,342 81.8% 360.422 126.6% (52.672) (0.53) 22.93 106.6% **FY 2017 2.606 B 44 44,252 135.9% 6,509 145.5% 858.870 135.2% (62.841) (1.31) 19.12** Q4 '17 2.606 B 44 13,517 141.4% 1,844 152.3% 265.053 148.1% (5.480) (0.45) 19.12 Q3 '17 1.949 B 39 11,719 133.3% 1,797 128.3% 225.379 128.0% (4.380) (0.29) 14.68 Q2 '17 2.718 B 30 10,682 145.3% 1,580 151.2% 209.365 142.0% (14.542) (0.28) 20.47 Q1 '17 23 8,334 120.3% 1,288 155.6% 159.073 118.1% (38.439) (0.28) 11.10 **FY 2016 21 18,761 187.6% 2,651 147.8% 365.148 180.0% (93.112)** Q4 '16 21 5,600 155.5% 731 106.827 151.3% (35.694) (0.26) Q3 '16 16 5,023 182.8% 787 98.844 177.1% (21.985) (0.16) Q2 '16 14 4,355 224.3% 629 86.526 202.5% (18.108) (0.13) Q1 '16 11 3,783 212.1% 504 72.951 237.7% (17.325) (0.13) **FY 2015 9 6,523 209.9% 1,070 681.0% 130.392 212.8%** Q4 '15 9 2,192 182.8% 42.514 200.7% Q3 '15 5 1,776 206.7% 35.668 202.4% Q2 '15 5 1,343 208.0% 28.607 202.8% Q1 '15 4 1,212 284.8% 21.603 243.0% **FY 2014 3 2,105 137 41.679** Q4 '14 3 775 14.137 Q3 '14 3 579 11.795 Q2 '14 2 436 9.449 Q1 '14 1 315 6.298
Thereafter, CVNA stock prices continued an upward trend, closing at $174/share on 8/5/2020, when after hours CVNA reported the following Q2 2020 results:
8/5/20 Q2 2020 EARNINGS REPORT
Q2 2020 Financial Results:
• Retail units sold totaled 55,098, an increase of 25%
• Revenue totaled $1.118 billion, an increase of 13%
• Total gross profit was $150 million, an increase of 9%
• Total gross profit per unit was $2,726, a decrease of $406 1
• Net loss was ($106) million, an increase of 66%
• EBITDA margin was (6.2%), a decrease from (3.6%) 2
• Basic and diluted net loss per Class A share was $0.62 based on 66.3 million shares of Class A common stock outstanding
Yikes! Perhaps disastrous quarterly results and performance, again in comparison with past quarterly results in the above 7-YEAR SUMMARY OF CVNA CORPORATE FINANCIALS table??? NOPE!!! On the following day 8/6/2020, the CVNA stock price substantially increased to an all-time high of $225.45/share, and closed at $222.99/share - up 28%. My huge CVNA investments back in March 2020 at share prices in the twenties had realized whooping gains of almost 800% in 5 months. The CVNA market cap spiked up over 735% from $4.554 billion on 3/19/20 to $38 billion on 8/6/20. Needless to say, on 8/6/2020, I sold a substantial amount of my CVNA shareholdings. I’m still a bit shell shocked, especially, since I had just been discharged from the hospital after major surgery and was recovering at home with daily visits by a home care nurse to change the dressing for my abdominal open wound that was healing from inside out. My bad luck, the wound got infected, and I was readmitted by ER for more surgery and am currently at home this time with a vacuum therapy for my wound to heal from inside out. Only now have I been able to comfortably make this post. My family’s IRA accounts are now overly cash heavy and I’ll need more time to conduct my due diligence on potential investments. Given the Corona virus pandemic, flu season around the corner, unknown outcomes of major political elections that will affect almost everything, and many other balls in the air, I may decide to just sit on the cash (I know, not preferred at this board) until things settle down.
CORPORATE FINANCIAL PERFORMANCE on 8/06/2020
**CARVANA** 8/06/20 GICS SECTOR Consumer Discretionary GISC INDUSTRY Automotive Retail MARKET CAP $ 37.989 B Employees 7,324 52-WK HIGH 225.45 PRICE/SHARE 222.99 52-WK LOW 22.16 Price Y-T-D change 142.2% Price change 52-wk 285.1% EV/Revenue (ttm) 7.57 P/S (ttm) 2.26
Carvana margins demand investor vigilance. In the Carvana Long Term Financial Goals, management set forth a long-term target of 15% to 19% for Gross Margin.
**MARGINS GROSS OPERATING PROFIT** Q2 '20 13.43% ( 8.02%) (3.65%) Q1 ‘20 12.60% (12.50%) (5.45%) FY ‘19 12.85% (7.11%) (2.91%) Q4 ‘19 12.92% (8.98%) (1.86%) Q3 '19 12.56% (6.43%) (3.56%) Q2 '19 13.9% (6.5%) (2.7%) Q1 ’19 11.7% (8.8%) (3.8%) FY '18 10.1% (11.7%) (3.2%) Q4 '18 9.6% (12.7%) (4.9%) Q3 '18 10.7% (10.9%) (2.9%) Q2 ‘18 10.3% (9.8%) (2.1%) Q1 ‘18 9.5% (13.6%) (2.0%) FY '17 7.9% (18.1%) (7.3%) Q4 ‘17 8.3% (17.0%) (18.9%) Q3 ‘17 9.1% (17.0%) (1.9%) Q2 ‘17 7.7% (17.2%) (7.0%) Q1 ‘17 FY '16 5.3% (24.5%) (25.5%)
Stock-based Compensation (SBC)
SBC/revenue ratios are favorably low.
**PERIOD SBC SBC/Revenue** **($ M)** Q2 '20 6.22 0.5% Q1 ‘20 5.94 0.5% Q4 ‘19 33.06 3.0% Q3 '19 9.621 0.9% Q2 '19 8.034 0.8% Q1 ’19 7.711 1.0% Q4 '18 6.205 1.1% Q3 '18 13.800 2.6% Q2 ‘18 2.580 0.5% Q1 ‘18 1.510 0.4% ------------------------ FY ‘19 58.426 1.5% FY '18 24.095 2.5% FY '17 5.611 0.7% FY '16 0.555 0.2% FY '15 0.490 0.4%
**CAPITAL STRUCTURE Q2 2020** Cash & cash equivalents (mrq) $ 246.299 M Working Capital $ 1,198.223 M Current Ratio (mrq) 4.21 LT Debt (mrq) $ 965.668 M (a) Stockholders’ Equity 973.081 M LT Debt/Stockholders’ Equity 99.2%
(a) I need more time to determine what’s included in this figure. The CVNA leadership is spending a lot of $$ to aggressively expand into new markets and expand its supporting infrastructure.
**FCF** ($ M) Q2 '20 ( 88.59) Q1 '20 (257.89) Q4 ‘19 (401.82) Q3 ’19 (203.08) Q2 ’19 (125.26) Q1 ’19 (257.71) Q4 ’18 (186.91) Q3 ’18 (118.19) ------------------------- FY 2019 (987.67) FY 2018 (558.01) FY 2017 (278.41) FY 2016 (279.76) FY 2015 (67.46) FY 2014 (33.93)
Why the 800% jump in share price? Here’s what I’ve found to date and concur with.
- 8/5/2020 COMMENTS BY ERNIE GARCIA, III - PRESIDENT, CEO AND CHAIRMAN in the
Carvana Co. (CVNA) Q2 2020 Earnings Call Transcript. CVNA earnings call for the period ending June 30, 2020.
Ernie Garcia, III – President, Chief Executive Officer and Chairman:
“Suddenly, buying cars online is becoming normalized. This is a big deal. We came into 2020 the market leader with a bright future. We are the market leader because from the very beginning, our guiding light has been delivering the best customer experiences available anywhere. To do that, we’ve recruited the best people to take up our mission alongside us. We built a culture of tireless energy and ambition, and we’ve invested in technology and infrastructure that are necessary to deliver on the constantly changing preferences and expectations of our customers. And we’ve done it all with the genuine discipline of a long-term focus. These things are easy to say and hard to do. They are the things that matter in the long run. They are an enduring differentiator and the reason our future was bright before. And now we have added the tailwinds of rapidly changing customer behaviors. Our future is even brighter now. In the immediate term, we are working to alleviate the operational constraints that have emerged as a result of our choice to defensively position the business at the onset of the pandemic, as well as the complications of ramping up at record speeds at the same time COVID-19 continues to impact many of our markets. The same production team that delivered over 10 times increase in production capacity over the last four years is up to the task. Now I’d like to turn to our results in the second quarter. We grew units by 25% in the quarter, including decreases in sales year-over-year in early April and growth of approximately 40% later in the quarter. This growth was achieved despite managing through the most difficult period of the pandemic and facing severe inventory constraints.”
On the competitive landscape:
“I would start with this, and I apologize for constantly beating the same drum here, but I do think this is a unique market. And it’s unlike many other retail markets where, on the use side, there’s 40 million transactions and depending on what numbers you’re looking at, there’s on the order of 40,000 dealers. This is a tremendously, tremendously fragmented market. And it’s a market that historically has had all of those players and has always been very competitive with offerings that are fairly undifferentiated, at least from a macro view. I think as a result, I think it’s very hard for any given competitor to materially impact anyone else. Until market shares get much more concentrated, I think that would be our expectation, that it would that would continue to be the case. I can’t think of a time in our history when we’ve looked inside of a market or across time and determined that we think the major driver of some line item that’s moving is competition. And I do think that that would be expected just given the structure of the market. Now I do think as more and more people move online, what we’ve historically seen is e-commerce is an expensive business to build, and it requires a lot of time and a lot of effort and a lot of tinkering and significant infrastructure and technology. And that kind of investment, it generally is not investment that can be made by lots and lots of players. And so there does tend to be more market concentration over time. I think that would be the first order effect. I also think these sorts of business models where there are real economies of scale, where as you get bigger, you have more selection for your customers and you have more of a brand, you maybe it feeds back into price, it feeds back into faster delivery time. Those sorts of things also drive more concentration. And so I think we would look at more concentration as the first order impact. And to the extent that happens, I think we’re going to be very happy. And then I think the second order impact could potentially be additional competition on things like marketing dollars. But we would expect that to be a follower not a leader, and we’ve seen no evidence of the contrary so far.”
[MY COMMENTS: Regarding Ernie Garcia’s barriers to entry, I addressed the following in my 5/22/2019 post at this board:
CARVANA IT INFRASTRUCTURE
Some posters in the case against Carvana thread and others seem to think that Carvana is a run-of-the-mill used car dealership. No. No. In my deep dive due diligence, I like to look behind the operations scene to find out what makes Carvana tick. Given its unique business model and e-Commerce platform of selling and distributing vehicles nationwide that is disrupting the industry, I was not surprised at all to find that CEO Ernie Garcia III and his corporate leadership team had deployed cutting-edge technology and IT infrastructure.
In 2016, when Imran Kazi joined the team as Carvana’s senior director of technology services, he found Carvana’s applications and data still residing in the former parent’s data centers. Instead of building Carvana’s IT from scratch, Kazi decided to build a hybrid infrastructure that would deliver flexibility for the company and took the following actions:
Migrated customer-facing and business applications, such as customer relationship management and enterprise resource planning software, across several cloud providers, including Microsoft Azure.
• Adopted SaaS offerings: RingCentral for unified communications and Google G Suite for email and collaboration.
• Chose the commercial cloud for three primary benefits: (1) it saves money; (2) it provides the company the agility it needs for growth; and (3) instead of having to manage infrastructure in the production environment, the cloud frees up IT staff for more strategic needs.
• Built a private cloud across two data centers using Nutanix’s HCI appliances, which combine servers, storage, networking and virtualization into a small-footprint appliance.These unified systems, which run on Nutanix’s license-free AHV hypervisor, are more energy efficient, easier to manage and easier to scale than traditional hardware. If the environment reaches capacity, Kazi can purchase new appliances and quickly configure them with Nutanix’s management software. Katz stated, “We can easily expand as we grow and have more projects.”
Since Kazi’s arrival, Carvana has grown rapidly nationwide, expanding from 11 cities to 109 [update: now 261]. It runs about 350 virtual machines across 25 clusters of Nutanix appliances. Data scientists, analysts and developers use them as a test and staging area for new applications and algorithms. The company uses analytics to understand customer preferences, discover new markets to enter and drive logistical efficiencies.
Through the private cloud, employees can fully test out applications and algorithms before deploying them in production in the public cloud. Having full control of in-house infrastructure aids that effort.
Kazi stated, “We can understand every nuance of the software and what resources it takes, and then we figure out the best cloud platform to put it into production.”
The company also installs a Nutanix appliance in each of its car inspection centers, where 360-degree photo technology takes data-intensive pictures of the cars. “We need the infrastructure locally to upload the photos to the cloud,” Kazi says.
Carvana moved away from an expensive and limited capability hardware-based legacy PBX system and chose RingCentral because the company wanted a single integrated collaborative communications solution that would scale easily as the business grows. RingCentral provides Carvana with an easy to manage solution that enables its IT department to work smarter, not harder, by utilizing the power of the cloud.
RingCentral will be used by employees at the Carvana headquarters, retail locations across the US, and will be used extensively by Carvana’s External Advocate team. Prior to RingCentral, these External Advocates had to use personal cell phone numbers when delivering cars, but now they will use their business numbers on their personal mobile devices when communicating with customers. RingCentral is also helping Carvana improve its customer experience through robust administrative controls and call analytics, which provides real-time visibility into call times and number of customers on hold. This will allow Carvana to identify areas in its customer communications that need improvement.
Carvana also selected RingCentral for its integrations with Salesforce and Okta. Salesforce is used by Carvana’s Advocate team to manage customer relationships. The integration creates an unparalleled experience for making or receiving calls through RingCentral, directly from within Salesforce. Also, RingCentral’s integration with Okta allows Carvana employees to use Single Sign-on to securely access RingCentral anytime, anywhere, and from any device.
I could go on, but I think now everyone gets the message that Carvana is not a run-of-the mill used car dealership.]
On CarvanaACCESS [background: On 6/25/20, Carvana launched CarvanaACCESS, a direct-purchase platform that gives independent and franchised dealers the ability to buy wholesale vehicles from Carvana. As consumer trade-ins and other wholesale vehicles are processed at Carvana locations across the country, they will be made available on CarvanaACCESS.com in a “timed bid” online auction enabled through a partnership with Manheim Digital. All vehicles on CarvanaACCESS are presented with full condition information and 360-degree imagery, ensuring buyers are informed and armed with detailed information in making their bidding and buying decisions.]
Ernie Garcia, III – President, Chief Executive Officer and Chairman:
“Let me start with CarvanaACCESS. So let me put CarvanaACCESS maybe in the context of buying cars from customers. So as Mark said, we bought as many cars from customers as we sold in July. That’s really, really exciting, and that generates a lot of inventory for us. Now some of those cars are going to fit our retail standards and some are not. For those that fit our retail standards, that’s pretty incredible because that’s a very significant collapse of the entire automotive value chain, where we are now buying a car from a customer and then producing it and preparing it for the customer and delivering it right to the next customer. There’s a lot of friction that has existed in the historical system that is being cut out of that transaction. And that’s really, really exciting. And the retail side feeds back on the purchasing side and vice versa. Because we have such a broad retail network that we can sell across brands and across geographies, we can bid a little more aggressively on cars that we’re buying. And then because we’re buying cars from customers directly, and we’ve got that proprietary source of inventory, we’ve got higher quality inventory with larger margins on the retail side of the business. So that’s really, really exciting. But there’s this kind of fork in the inventory that you buy from customers that doesn’t fit on the website. And so and that’s they’re great cars, they just don’t fit our retail standards. And so at CarvanaACCESS, it’s a way for us to take those cars and get them to dealers or other partners that buy wholesale inventory and deliver those cars to them in a way that’s also very efficient. And that efficiency feeds back in the same ways as the efficiencies of the retail business. So that’s what’s going on there. We think that’s another exciting development and another step toward our long-term goals in both retail and wholesale margin.”
- Used-car sales trends are positive, according to a recent 8/5/2020 Edmunds news article: “Used Vehicle Prices Are on the Rise During the Coronavirus Pandemic, According to Edmunds - Experts note that new vehicle shortages, favorable financing conditions are driving increased consumer demand in the used market”
According to Edmunds, a vehicle research firm that also offers online auto purchasing, used vehicle prices are seeing an unseasonably sharp uptick due to unique market conditions created by the coronavirus pandemic.
Ivan Drury, Edmunds’ senior manager of insights, stated:
"We’re seeing evidence of more typical new-car shoppers gravitating toward the used car market than usual during the pandemic due to a combination of factors. Consumers are being more financially responsible, interest rates have been extremely favorable, and inventory has been severely limited on the new side. Shoppers might be a bit surprised to find that prices are ratcheting up on used vehicles because of significantly increased demand.”
He further added: “It’s a seller’s market right now. Although used vehicles continue to offer significant discounts compared to new, used-car shoppers will find themselves in the unusual position where they might not have as much negotiation power because demand is so high and dealers will be less inclined to be flexible. If you’re in the market for a used car, what you see in terms of pricing is likely what you’re going to get, so do your research and be prepared to act quickly if you have your heart set on a vehicle.”
Carvana recently received several increases in the price target of its stock.
One was Cowen analyst John Blackledge, who raised his price target on Carvana stock to 174 from 94. He maintained a rating of outperform.
Needham analyst Brad Erickson raised his target to 200 from 135, with a buy rating. “We believe the secular shift toward online car buying continues,” Erickson wrote in his note to clients.
Long Term Financial Goals of Carvana Management
Carvana management remains focused on their highly ambitious long-term goals of selling 2 million+ vehicles per year and becoming the largest and most profitable automotive retailer.
Carvana corporate leadership uses the following long-term financial model to evaluate their results and progress towards each of their financial objectives.
**LONG TERM** **Carvana (CVNA) FY 2016 FY 2017 FY 2018 FY 2019 Q1 2020 Q2 2020 TARGET** YOY Revenue Growth 180% 135% 128% 101% 45% 13% - Gross Margin 5.3% 7.9% 10.1% 12.9% 12.6% 13.4% 15% - 19% Advertising 7.4% 6.5% 5.7% 5.2% 6.8% 5.6% 1.0% - 1.5% SG&A ex. Advertising & D&A 21.1% 18.2% 14.9% 13.7% 16.9% 14.3% 4.5% - 5.5% D & A 1.3% 1.3% 1.2% 1.0% 1.4% 1.6% 0.5% - 1.0% SG&A Total as % of Revenue 29.8% 26.0% 21.7% 20.0% 25.1% 21.5% 6% - 8% Net Loss Margin (25.5)% (19.1)% (13.0)% ( 9.3)% (16.7)% (9.5)% - EBITDA Margin (23.2)% (16.9)% (10.5)% (6.2)% (12.6)% 6.2)% 8% - 13.5%
- Consensus from 21 of the American Specialty Retail analysts is that Carvana is on the verge of breakeven. They expect the company to post a final loss in 2022, before turning a profit of US$343m in 2023. So, the company is predicted to breakeven approximately 3 years from now. How fast will the company have to grow each year in order to reach the breakeven point by 2023? Working backwards from analyst estimates, it turns out that they expect the company to grow 61% year-on-year, on average, which is extremely buoyant. Should the business grow at a slower rate, it will become profitable at a later date than expected.
Given this is a high-level overview, we won’t go into details of Carvana’s upcoming projects, however, bear in mind that by and large a high forecast growth rate is not unusual for a company that is currently undergoing an investment period.
Source: 8/24/2020, Analysts Expect Loss-Making Carvana Co. (CVNA) To Breakeven In 3 Years
Although outside of the current focus and growth mantra of this board, Carvana is absolutely an aggressive high-growth disruptive company for the long-term.
For now, I intend to stick with Carvana management’s objectives and Long-Term financial goals, vigilantly watch their execution and progress and continue to invest in Carvana.
Carvana is another one of my diversified holdings in my family’s accounts.
As always conduct your own due diligence and decision-making.