CVNA Q4/FY 18 triple digit gains continue

In his 2/27/2019 Letter to Shareholders, Carvana (CVNA) co-founder and CEO Ernie Garcia III reported the following for Q4 and FY 2018:…
[Note: Throughout the letter there is reference to items as “including Gift” that include the impact of the compensation expense related to the 100k Milestone Gift to employees, in accordance with GAAP. There is also reference to several measures that are presented “ex-Gift,” which exclude the impact of the 100k Milestone Gift to employees.]

Q4 2018:
We grew units and revenue by 105% and 121% respectively in Q4 YoY, marking our 20th consecutive quarter of triple-digit unit and revenue growth. While our growth remained at an extremely high level, we finished at the lower half of our guidance range due to a Cyber Monday promotion that was more similar to last year than to 2015 and 2016. EBITDA margin was below our guidance range by 30bps, equating to approximately $2 million dollars, due to the lower units and small incremental investments to prepare for a strong first half of 2019. Unless otherwise noted, all financial comparisons stated below are versus Q4 2017.

Q4 2018 GAAP Results
• Retail units sold totaled 27,750, an increase of 105%
• Revenue totaled $584.8 million, an increase of 121%
• Total gross profit, including Gift, was $56.1 million, an increase of 156%
• Net loss, including Gift, was $86.4 million, an increase of 83%
• Basic and diluted net loss, including Gift, per Class A share was $0.74 based on 39.4 million shares of Class A common stock outstanding

Q4 2018 Ex-Gift Results, non-GAAP
• Total gross profit per unit ex-Gift was $2,131, an increase of $512
• EBITDA margin ex-Gift was (10.8%), an improvement from (15.5%)
• Adjusted net loss per Class A share, was $0.55, based on 149.4 million adjusted shares of Class A common stock outstanding, assuming the exchange of all outstanding LLC Units for shares of Class A common stock

Q4 2018 Other Results
• We opened 7 new markets and 1 vending machine, bringing our end-of-quarter totals to 85 and 15, respectively
• We lowered our average days to sale to 59, from 63 last quarter and 72 in Q4 2017

FY 2018:
All financial comparisons stated below are versus 2017, unless otherwise noted. Complete financial tables appear at the end of this letter.

FY 2018 GAAP Results
• Retail units sold totaled 94,108, an increase of 113%
• Revenue totaled $1.96 billion, an increase of 128%
• Total gross profit, including Gift, was $196.7 million, an increase of 189%
• Net loss, including Gift, was $254.7 million, an increase of 55%
•Basic and diluted net loss, including Gift, per Class A share was $2.24 based on 30.0 million sharesof Class A common stock outstanding

FY 2018 Ex-Gift Results, non-GAAP
• Total gross profit per unit ex-Gift was $2,133, an increase of $594
• EBITDA margin ex-Gift was (9.9%), an improvement from (16.9%)
• Adjusted net loss per Class A share, was $1.73, based on 143.8 million adjusted shares of Class A common stock outstanding, assuming the exchange of all outstanding LLC Units for shares of Class A common stock

After reporting his company’s 2018 Q4 and FY earnings, CVNA jumped up almost 10% at one moment in after hours trading on 2/27/2018.



**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**

2/27/18  6.370 B                                                                                  41.82

**FY 2018	 4.712 B   85   94,108    112.7%   15,125    132.4% 1,955.467	127.7%	(61.754)  (2.24)  32.71	  [xx.xx](http://xx.xx)**

Q4 '18	 4.712 B   85   27,750    105.3%    4,717    155.8%   584.838	120.6%	(28.704)  (0.74)  32.71   									          	
Q3 '18	 5.428 B   78   25,324	  116.1%    4,408    145.3%   534.921   137.3%  (16.042)  (0.50)  38.75  164.0%								
Q2 '18	 5.818 B   65   22,570    111.3%    3,658    131.5%   475.286	127.0%	 (9.965)  (0.41)  41.60	 103.2%
Q1 '18	 3.003 B   56   18,464    121.6%    2,342     81.8%   360.422	126.6%	 (7.043)  (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  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																								       					

The following shows that Q4 and FY 2018 results have met or exceeded corporate guidance given last quarter, with only one exception EBITDA margin.

 **Q4 ’18 GUIDANCE                                  Q4 '18 ACTUAL     CHANGE**		
Retail unit sales	 27,500 - 30,000   Increase of 103% - 122%         27,750            105%
Total Revenue	         $570 M - $630 M   Increase of  115% - 138%       $   584.838 M      121%
Total Gross Profit/unit  $2,000 - $2,350   Increase from $1,619           $ 2,023           
EBITDA margin	        (10.5%) - (8.5%)   Improvement from (15.5%)
 **FY 2018 GUIDANCE                                  FY 2018 ACTUAL    CHANGE**	   	
Retail unit sales	 93,858 - 95,500   Increase of 112% - 118%         94,108            113%
Total Revenue	        $1.94 B - $2.0 B   Increase of 126% - $133%       $ 1,955.467 B      128%
Total Gross Profit/unit  $2,100 - $2,175   Increase from $1,539           $ 2,133
EBITDA margin	         (9.8%) - (9.2%)   Improvement from (16.9%)           (9.9%)
Market openings	               40	   Increase from 23 openings          41
                                           in 2017, bringing
		                           end-of-year total to 84  

The CEO letter gives corporate guidance for only fiscal year 2019 as follows with expectations that triple digit YOY growth in total retail units sales and total revenue will continue:

**FY 2019 GUIDANCE**	   	
Retail unit sales	    160,000 - 165,000	 Increase of 112% - 118% 
Total Revenue	             $3.4 B - $3.5 B	 Increase of 126% - $133%
Total Gross Profit per unit  $2,450 - $2,650	 Increase from $1,539
EBITDA margin	             (5.5%) - (3.5%)	 Improvement from (16.9%)
Market openings	                 50 - 60	 Increase from 41 market openings in 2018, bringing
		                                 our end-of-year total to 135-145 markets and our
                                                 total U.S. population coverage to at least 65%



Excerpts from the latest Q4/FY 2018 report:

Our management team remains focused on delivering an exceptional and unparalleled customer experience while simultaneously growing the business rapidly and achieving our financial objectives. We firmly believe wowing the customer is the core of our model and drives all other metrics. To realize our long-term vision, our three primary financial objectives remain unchanged: (1) Grow Retail Units and Revenue; (2) Increase Total Gross Profit Per Unit; and (3) Demonstrate Operating Leverage.

Objective #1: Grow Retail Units and Revenue

CVNA reported the following:

We again recorded triple-digit growth in Q4, as retail units sold increased to 27,750, up 105% from 13,517 in the prior year period. Revenue in Q4 grew to $584.8 million, up 121% from $265.1 million in Q4 2017. Our growth in the fourth quarter was broad based, driven by gains across our markets nationwide.
Our 2013 cohort grew by 2,690 units in the full year 2018 vs 2017, while the 2014 cohort grew by 1,287 units, 2015 by 3,915 units, 2016 by 6,646 units, and 2017 by 16,850 units. In its first year, the 2018 cohort contributed 7,132 units, or approximately 8% of total. Out of market sales grew by 11,336 units. Out of market sales primarily consist of sales in smaller cities and towns around our core markets that are fulfilled on our first party network.

Buying Cars from Customers
We also saw substantial gains in our business of sourcing cars from customers in 2018. Total vehicles acquired from customers grew by 229% in 2018 vs. 2017. Wholesale units sold, which are primarily sourced from customers, increased by 132% to 15,125 in 2018 from 6,509 in 2017. Similarly, retail units sold sourced from customers increased by 376% 2018 vs. 2017.

Objective #2: Increase Total Gross Profit Per Unit (GPU)

The following are Carvana excerpts:

We achieved another strong quarter of total GPU growth on our way toward our $3,000 midterm goal. Items “including Gift” reflect the impact of the compensation expense related to the 100k Milestone Gift to employees, in accordance with GAAP. Ex-Gift items exclude the compensation expense impact of the 100k Milestone Gift to employees and are non-GAAP metrics.

For Q4 2018:

• Total
o Total GPU (incl.Gift): $2,023 vs. $1,619 in Q4 2017
o Total GPU ex-Gift: $2,131 vs. $1,619 in Q4 2017

• Retail
o Retail GPU (incl.Gift): $810 vs. $751 in Q4 2017
o Retail GPU ex-Gift: $914 vs. $751 in Q4 2017
o Gains in retail vehicle GPU were primarily driven by lower average days to sale, which declined
from 72 to 59

• Wholesale
o Wholesale GPU (incl.Gift)was $36 vs.$50 in Q4 2017
o Wholesale GPU ex-Gift was $40 vs. $50 in Q4 2017
o Changes in wholesale GPU were driven by higher wholesale unit volume (+156%) relative to
retail units (+105%), offset by lower gross profit per wholesale unit sold ($212 incl. Gift and $236
ex-Gift vs. $364 in Q4 2017).

• Other
o Other GPU was $1,177 vs. $819 in Q4 2017
o Gains in Other GPU were driven by higher attachment of financing and VSC,as well as the $2.4 million fee we received for facilitating the refinancing of a previously sold pool of finance receivables. We plan to continue executing refinancing or similar transactions going forward as we expand our financing monetization program. We also recognized an expected $1.9 million excess reserve reimbursement based on the historical performance of our VSCs sold to date versus reserves held by the VSC provider. At current performance we expect to earn approximately $10-$15 per retail unit in excess reserve reimbursements on our VSC product going forward.

For FY 2018:

• Total
o Total GPU (incl.Gift): $2,090 vs. $1,539 in FY 2017
o Total GPU ex-Gift: $2,133 vs. $1,539 in FY 2017
o Our GPU improvements for the year were broad-based, including improvements on retail used vehicles, wholesale vehicles, and other products. Our gains in retail used vehicle GPU were primarily driven by reducing average days to sale (approximately $270). Our gains in other GPU were driven by higher upfront premiums on the sale of our finance receivables, the addition of our refinancing transactions increasing loan monetization, higher penetration of VSCs, and a full year with GAP waiver coverage. We also saw small gains in wholesale gross profit, driven by higher volumes and increased GPU per wholesale unit. We expect further gains in all three gross profit components in 2019.

Objective #3: Demonstrate Operating Leverage

The following are Carvana excerpts:

We demonstrated meaningful operating leverage in 2018 and expect another strong year in 2019 as we progress toward our long-term SG&A goals.

For Q4 2018:

• Total SG&A levered by 2.9% incl. Gift and 3.0% ex-Gift, primarily reflecting benefits from scale
• Compensation and benefits levered by 0.8% incl. Gift and 1.0% ex-Gift, primarily reflecting benefits from scale
• Advertising levered by 0.7%, reflecting leverage in existing markets offset by new markets
• Logistics and market occupancy was approximately flat, reflecting our coast-to-coast network expansion
• Other SG&A levered by 1.4%, primarily reflecting benefits from scale

For FY 2018:

• Total SG&A levered by 4.3% incl. Gift and 4.7% ex-Gift, primarily reflecting benefits from scale
• Compensation and benefits levered by 1.8% incl. Gift and 2.2% ex-Gift, primarily reflecting benefits from scale
• Advertising levered by 0.8%, reflecting leverage in existing markets offset by new markets
• Logistics and market occupancy was approximately flat, reflecting our coast-to-coast network expansion
• Other SG&A levered by 1.7%, primarily reflecting benefits from scale

We achieved meaningful operating leverage in 2018 while continuing to make significant investments focused on long-term growth, scalability, and customer experience. For example, we completed two acquisitions, Car360 and Propel AI, and made significant investments in technology infrastructure and management bench strength throughout the year to prepare us for continued high rates of growth. We are excited about our progress integrating these investments into our business and believe they will deliver substantial benefits in the years to come.

We also nearly doubled markets for the second consecutive year and broadened our geographic footprint from Boston in the Northeast to San Diego in the Southwest. SG&A expenses that are correlated with new market openings levered despite this expansion, with reductions in advertising and market occupancy expense as a percent of revenue partially offset by increases in logistics expense. We expect these expenses to lever over time as our markets scale, as seen in our cohort advertising expense per unit curves.

Logistics expense delevered by 12 basis points in 2018, largely due to ramping our Phoenix IRC beginning in late 2017. We expect logistics expense as a percent of revenue to stay elevated in 2019 while our nationwide logistics network is serviced by just a handful of IRCs, but to decline over time as we add density to our IRC network and decrease the average miles traveled from our IRCs to our customers.
For the full year 2019, we expect to again make significant gains in improving our EBITDA margin ex-Gift as the underlying leverage in our cohorts becomes more visible at the corporate level.


We launched 7 new markets in the fourth quarter and 41 for the full year bringing our total markets to 85 as of December 31, 2018. This increases the total percentage of the U.S. population our markets collectively serve to 58.6%, up from 41.2% at the end of FY 2017. We also opened 1 vending machine in the quarter in Indianapolis, bringing our year-end total to 15. We continue to see noticeable increases in market penetration following the launch of a vending machine and are excited to launch several more in 2019.

We view our coast-to-coast logistics network and capital- and headcount-light market opening model as a key competitive advantage and expect to leverage that advantage in 2019. With our infrastructure in place, we expect to set another record in 2019 with 50-60 market openings. These 50-60 markets will largely utilize our existing network, leading to faster launch timelines and lower incremental capital expenditures than previous market launches. We expect our markets to cover at least 65% of the population by year end.

Inspection & Reconditioning Centers

As our rapid growth continues, we expect Inspection & Reconditioning Centers (IRCs) to play an important role in our strategy. Increasing sales means we can hold a broader selection of inventory at any given average days to sale. Additional IRCs enable us to produce and hold more cars to support growth in sales and inventory. Building out our logistics and IRC network will lead to better selection, shorter shipping distances, and faster shipping times, which we expect to result in higher conversion and lower shipping costs.
We expect our IRC footprint to evolve in several ways as we expand. Historically, each of our first five IRCs, including Indianapolis, included three production lines, each of which can be run on two (or optionally, 2.5-3) shifts per day, amounting to six production shifts per facility. At full utilization, we estimate six production shifts to equate to approximately 50,000 units per year of production capacity, or 250,000 units total across the five facilities.
We expect two refinements to this baseline in 2019. First, both our Phoenix and Indianapolis facilities have the ability to expand to 4 production lines (or 8 production shifts at two daily shifts per line), bringing their total capacity at full utilization to approximately 67k units per year. We plan to invest in expanding both facilities in 2019 in preparation for 2020.
Second, in 2019 we plan to launch two IRCs with 2 production lines each (or 4 daily production shifts) and begin construction on a third with up to 4 production lines (or up to 8 daily production shifts), bringing our targeted total after these additions to 8 IRCs with a total annual capacity at full utilization of approximately 400k units.
The two 2-line IRCs – one in Cleveland and a second we will announce this spring – were previously operated by DriveTime. We expect both IRCs to have total capacity at full utilization of approximately 33k units per year. Following the transition at each location, we will be the sole occupant of both facilities and pay all associated rent and facilities expenses, similar to our other IRC leases.
We expect capital expenditures for new IRC facilities to be approximately $10-12 million per line. This per line total is approximately $1.5 million per line higher than our previous expectations based on enhancements that we are implementing to increase throughput and improve long-term scalability.
Over time, we plan to finance our new IRC real estate investments primarily with sale-leasebacks. To give a sense of magnitude, at full utilization and assuming an 8% annual lease capitalization rate, the total rent expense associated with these IRC investments would be approximately $48-58 per vehicle produced.

[MY NOTE: Carvana provides complete transparency about “Finance Leases” stating in its FY 2018 10K Report: The Company finances certain purchases and construction of its property and equipment through various sale-and-leaseback transactions that do not qualify for sale accounting due to forms of continuing involvement. Accordingly, the Company records the assets subject to these transactions within property and equipment and the sales proceeds as finance leases within long-term debt in the accompanying consolidated balance sheets. Required monthly payments, less the portion considered to be interest expense, reduce the corresponding liabilities. See Note 8 — Debt Instruments for additional information on finance leases. Carvana also provides more transparent details in NOTE 6 - RELATED PARTY TRANSACTIONS Lease Agreements on pages 99-03. Bottom-line: Carvana gets no free rides from anyone.]



GICS SECTOR	  Consumer Discretionary   
GISC INDUSTRY	     Automotive Retail	      
MARKET CAP	           $  6.37 B	           
Employees	              3,879             
52-WK HIGH	              72.59	              
PRICE/SHARE 	              41.82	              
52-WK LOW	              16.02	              
Price Y-T-D change	      27.8%	              
Price change 52-wk	     170.1%	              
S&P 500 52-wk change	       2.9%	               

EV/EBITDA (mrq)	             -12.51	              
P/E (ttm)	                N/A	              
Fwd P/E	                     -34.56	              
EV/Revenue (ttm)	       1.32	               
P/S (ttm)	               3.89	              

After reporting its 2018 Q4 and FY earning on 2/27/18, CVNA jumped up almost 10% at one moment in after hours trading.


Carvana margins demand investor vigilance. So far, during its ongoing growth and expansion phase, Carvana is realizing positive improvements in all three margins.


FY '18	10.1%	   (TBD)	(3.2%)

Q4 '18   9.6%      (TBD)        (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%)

Regarding gross margin, cost of sales includes the cost to acquire used vehicles and direct and indirect vehicle reconditioning costs associated with preparing the vehicles for resale. Vehicle reconditioning costs include parts, labor, inbound transportation costs and other incremental overhead costs, which are allocated to inventory via specific identification and standard costing. Occupancy and labor costs incurred in connection with expanding production capacity are expensed as incurred as a component of selling, general and administrative expense. The Company has certain inventory that does not meet its specifications to sell to customers and disposes of this inventory through sales at auction or through other channels. The cost of these disposals are recorded on a net basis in cost of sales. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.


SBC/revenue ratios are favorably low.

**PERIOD	 SBC	SBC/Revenue** 
**($ M)**		       
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 '18 24.095	   2.5%		
FY '17	5.611	   0.7%	      
FY '16	0.555	   0.2%	      
FY '15	0.490	   0.4%	      



A huge primary market target of CVNA are millennials who came out of their motherly wombs texting on their mobile smartphones. ALL of the top CVNA corporate executives are millennials.

You can get an offer for your used car from Carvana in 2 minutes as follows:

  1. GET A REAL OFFER. Our real offer will be guaranteed for 7 days or 1,000 additional miles. No haggling. No lowballs.
  2. WE PICK UP YOUR CAR. Set your pick up for a time convenient for you. We can pick up as soon as the next day.
  3. GET PAID ON THE SPOT. We’ll do a quick review of the car and make sure everything is in order. Then, hand you a check!
    Via the vehicle’s VIN, Carvana’s software program gains access to all the vehicle components and accessories that are priced out and totaled in a quick offer.

Finally, here’s a recent excellent review about Carvana’s Used Car Financing by a highly reputable author Philip Reed, who writes about cars for NerdWallet and got the scoop directly from Ryan Keeton, Carvana co-founder and chief brand officer.…



My original Carvana post on 11/26/2018 acknowledges that although this company (a) is not a software company with recurrent revenue, (b) sells things, i.e., used cars, (c) is capital intensive, and (d) has low gross margins akin to its automotive retail industry, Carvana is the rare exception that over a 5-year period not only delivers triple digit Y-o-Y revenue growth, but also triple digit Y-o-Y increases in the number of markets entered and corresponding triple digit Y-o-Y increases in the number of used cars sold and expects to continue this trend through FY 2019.…

Carvana is disrupting and transforming the retail used car sector with their company’s custom-built business model and e-Commerce platform. Its business plan and operations provide a distinct diversification for my family’s portfolios and are far easier for me to understand and follow than some SAAS companies and the likes of MongoDB.

I’ll also reiterate that the U.S. retail used car marketplace is not only huge, but also highly fragmented. There are approximately 43,000 used car dealerships in the U.S. according to Borrell Associates’ 2017 Outlook, including approximately 27,000 independent dealerships. The largest dealer brand commands approximately 1.7% of the U.S. market and the top 100 used car retailers that include the likes of big boys CarMax and DriveTime collectively hold only about 7.0% market share, according to, publicly-listed dealership filings and Automotive News. That leaves Carvana mucho room to grow and expand especially as an e-commerce business.

As always, conduct your own due diligence and decision-making.



Nice write up Ray. Thanks for the effort, good to see some additional opportunities beyond the usual suspects. Thanks for tracking this.

I guess 3 thoughts about this investment opportunity in terms of risk:

  1. What would be the impact of a recession on car buying in the US?
  2. What is the risk of a blow up in the auto loan defaults - the growth in numbers of this (and student loans) in the US looks scary?
  3. What is the potential for international expansion?


Here are my responses to Anthonyms’ 3 thoughts about this investment opportunity in terms of risk.

2) What is the risk of a blow up in the auto loan defaults - the growth in numbers of this (and student loans) in the US looks scary?

The issue at hand involves first auto loan delinquency that may or may not lead to default, i.e., delinquency means a person is behind on payments; once delinquent for a certain period of time, the lender declares the loan to be in default, and the entire loan balance becomes due at that time.

Recently on 2/12/2019, the New York Fed issued its 2018:Q4 Quarterly Report on Household Debt and Credit [that I highly recommend everyone read regardless of their investment interests at this board] that reported the following on debt and auto loan delinquencies:
Full report…
Press Release 2/12/19…

Total household debt increased by $32 billion (0.2%) to $13.54 trillion in the fourth quarter of 2018. It was the 18th consecutive quarter with an increase and the total is now $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008. Furthermore, overall household debt is now 21.4% above the post-financial-crisis trough reached during the second quarter of 2013. The Report is based on data from the New York Fed’s Consumer Credit Panel, a nationally representative sample of individual- and household-level debt and credit records drawn from anonymized Equifax credit data.

Housing Debt
• Mortgage originations declined to $401 billion from $445 billion, the lowest level seen in nearly four years.
• Mortgage delinquencies were roughly flat, with 1.1% of mortgage balances 90 or more days delinquent.

Non-Housing Debt
• Outstanding student loan debt increased to $1.46 trillion from $1.44 trillion.
There were $144 billion in newly originated auto loans, continuing the nine-year growth trend. In fact, auto loan originations totaled $584 billion in 2018, the highest year in the 19-year history of the data for auto loan originations (in nominal terms). [My emphasis in bold]
• Credit card balances rose by $26 billion to $870 billion. The increase in credit card balances is consistent with seasonal patterns but marks the first time credit card balances re-touched the 2008 nominal peak.

Joelle Scally, Administrator of the Center for Microeconomic Data at the New York Fed commented: “Auto loan originations for 2018 reached an all-time high in our dataset and the growth has been driven by creditworthy individuals. Despite auto debt’s increasing quality, its performance has been slowly worsening. Growing delinquencies among subprime borrowers are responsible for this deteriorating performance, and younger borrowers are struggling most acutely to afford their auto loans.”

Earlier on 8/15/2018, the Kansas City FED The Macro BULLETIN “Auto Loan Delinquency Rates Are Rising, but Mostly among Subprime Borrowers” reported the following [my emphasis in bold]:…

Steady increases in U.S. auto debt over the past seven years have raised concerns over credit quality and delinquency in consumers’ repayment. We investigate these concerns and find that the credit quality of auto debt has actually improved throughout the current expansion. Delinquency rates have been rising mostly among subprime borrowers, who represent about a quarter of total outstanding auto debt. However, the potential risks to the financial sector are currently unknown and warrant close monitoring.

[MY NOTE: Please read bulletin and view charts for full comprehension.]

Overall, rising auto debt and delinquency rates do not yet appear to pose major risks to the auto sector or the macroeconomy. Subprime borrowers represent less than a quarter of outstanding auto debt as of the second quarter of 2018, and average credit quality has been increasing since the Great Recession. However, the potential risks to the financial sector from rising auto delinquency rates among subprime borrowers warrant continued monitoring should credit quality begin to ease or economic and employment growth slow.

Now looking at Delinquency Rate on All Loans, All Commercial Banks provided by the St. Louis FED shows the following:

**2nd lowest:  1.57 for Q4 2018**
Highest:     7.50 for Q1 2010
Lowest:      1.45 for Q2 2006

For a breakdown of loan types (e.g., credit card, residential mortgage ) see this St. Louis FED website:

So, given the above, it is highly unlikely that auto loan delinquencies/defaults alone could bring down the U.S. financial system as did OTC financial derivatives (credit default swaps), collateralized debt obligations (CDOs) and mortgages in the lead up to a disastrous financial crisis and the U.S. Great Recession from December 2007 to June 2009, which segues to the next question.

1) What would be the impact of a recession on car buying in the US?

In my first Carvana post back on 11/26/2018, I included a table that showed annual sales for the business of motor vehicle and parts dealers, given in the latest 2016 Annual Retail Trade Survey Estimated Annual Sales of U.S. Retail Firms by Kind of Business: 1992-2016 by the U.S. Census. The 2016 annual sales for the business of motor vehicle and parts dealers accounted for $1.144 trillion or 24% of the total $4.856 trillion retail sales in the U.S.

The U.S. Great Recession was a severe financial crisis combined with a deep recession that officially lasted from December 2007 to June 2009. Simultaneously, the automotive industry crisis of 2008–2010 was a part of a global financial downturn. The crisis affected European and Asian automobile manufacturers, but it was primarily felt in the American automobile manufacturing industry. The downturn also affected Canada by virtue of the Automotive Products Trade Agreement.

In that post, I commented: When the automobile retail industry dropped from 23% in 2007 to 19% in 2009 as shown in the above table, the incoming new Obama administration came up with the Cash for Clunker program as part of their 2009 economic stimulus program that was sold as a lifeline from the federal government to a sinking U.S. auto industry. The program turned out to be a lemon, as further verified in 2015 by researchers at Texas A&M in their economic study [ ] that measured the impact of Cash for Clunkers on sales and found the program actually decreased industry revenue by $3 billion over a nine-to-11-month period. The “stimulus” also cost taxpayers $3 billion. The program let people turn in their old cars for up to $4,500 in cash to be used toward the purchase of a more fuel-efficient alternative. Nearly 700,000 vehicles were traded in through the program.

Since Carvana did not exist back then, I chose in the following table to show highlighted in bold the impact of the 2007-2010 financial crisis and Great Recession on CarMax (KMX), the nation’s largest retailer of used vehicles, and AutoNation (AN), the nation’s largest automotive dealer of primarily new vehicles, in terms of revenue, share price and market cap.

 **U.S. CENSUS**
**Motor Vehicles							   Auto**
**Parts Dealers	     CarMax	        KMX	     KMX	  Nation	   AN		    AN**
**Retail Sales  Change MktCap  Change  Revenue Change PRICE Change  MktCap Change REVENUE  Change   PRICE  Change**
**$B	       YoY     $ B    YoY	$ B    YoY     $    YoY     $ B    YoY	   $ B     YoY	     $	   YoY**
3/1/19	     NA 	      10.48	        	    61.65	    3.14                           34.89					

FY 18        NA		      11.15   -5.7%  17.120   7.8%  62.73   -2.2%   3.36  -33.3%  21.413   -0.6%   35.70  -30.5%
FY 17	     NA		      11.83   -4.4%  15.875   4.8%  64.13   -0.4%   5.04   -0.2%  21.535   -0.3%   51.33    5.5%
FY 16   1,144.419      4.6%   12.38   11.6%  15.150   6.2%  64.39   19.3%   5.05  -21.2%  21.609    3.6%   48.65  -18.4%	
FY 11	  812.938      9.4%    7.03   -3.2%   8.976  20.2%  30.48   -4.4%   5.18   22.5%  13.832   11.0%   36.87   30.7%
FY 10	  742.913     10.6%    7.26   34.7%   7.470   7.1%  31.88   31.5%   4.23   28.6%  12.461   16.8%   28.20   47.3%
**FY 09	  671.772    -14.5%    5.39  194.5%   6.974 -15.0%  24.25  207.7%   3.29  116.4%  10.666  -19.4%   19.15   93.8%**
**FY 08	  785.865    -13.7%    1.83  -57.4%   8.200   9.8%   7.88  -60.1%   1.52  -39.4%  13.239  -19.2%    9.88  -36.9%**
**FY 07	  910.139      1.1%    4.30  -26.0%   7.466  19.3%  19.75  -26.4%   2.51  -48.7%  16.385  -10.1%   15.66  -26.5%**
FY 06	  899.997      1.3%    5.81   90.5%   6.260  19.0%  26.82   93.8%   4.89  -16.0%  18.219	   21.32   -1.9%
FY 05	  888.307	       3.05	      5.260	    13.84	    5.82			   21.73	
FY 02	  818.811      0.4%				     8.94  -21.4%				   12.56    1.9%
FY 01	  815.579      2.4%				    11.37  477.2%				   12.33  105.5%
**FY 00	  796.210      4.2%				     1.97   69.8%				    6.00  -28.1%**
**FY 99	  764.204     11.0%				     1.16  -56.9%				    8.35  -37.8%**
**FY 98	  688.415      5.3%				     2.69  -40.2%				   13.43  -36.2%**
FY 97	  653.817					     4.50					   21.04	

For FY 2007, 2008 and 2009, while the U. S. total retail revenues for Motor Vehicles & Parts Dealers slowed down significantly and substantially from 1.1% to -13.7% to -14.5% respectively:

• CarMax realized significant percentage changes in revenue from 19.3% to 9.8% to -15%, share price from -26.4% to -60% to recovery 207%, and market cap from -26% to -57.4% to recovery 194%, respectively.

• AutoNation realized significant percentage changes in revenue from -10% to -19% to -19%; share price from -26% to -37% to recovery 93.8%; and market cap from -48% to -39% to recovery 116%, respectively.

I also show in the above table that, although U.S. retail sales for motor vehicles and parts dealers continued to increase annually, huge share price drops occurred for both CarMax and AutoNation in the late 1990s when the most foolhardy example of a deregulatory mindset occurred with respect to OTC derivatives.

Brooksley Born, who was the head of the Commodities Futures Trading Commission and the foremost expert on OTC financial derivatives (e.g., credit default swaps CDSs), foresaw the risks that these instruments posed to the economy and sought to regulate them. However, the Clinton administration’s "all boys club” working group led by Treasury Secretary Robert Rubin and Larry Summers, joined with FED Chairman Alan Greenspan and SEC Chairman Arthur Levitt to derail her proposal. Ms. Born’s proposals were not that onerous: basically she wanted more transparency and a requirement of reserves to cushion losses. However, Larry Summers, Robert Ruben’s deputy at Treasury, argued that her proposals would lead to a financial crisis. As history has proved, Born was correct, and it was the deregulatory mindset of Rubin, Summers and Greenspan that led to a major disastrous financial crisis and the Great Recession (2007-2009).

In 1998, the sudden meltdown and bailout of the trillion-dollar Long-Term Capital Management (LTCM) hedge fund showed the dangers of large derivative bets staked on borrowed money. Using mathematical models to calculate debt risk, LTCM had used derivatives to leverage $5 billion into more than $1 trillion, doing business with fifteen of Wall Street’s largest financial institutions. The derivative transactions were not regulated, nor were investors able to evaluate LTCM’s exposures. Born stated, “I thought that LTCM was exactly what I had been worried about”. In the last weekend of September 1998, the President’s working group was told that the entire American economy hung in the balance. After intervention by the Federal Reserve, the crisis was averted. But by March 1999, Greenspan was once again praising derivatives as hedging instruments and as enhancing the ability “to differentiate risk and allocate it to those investors most able and willing to take it.”
In 1993, the Securities and Exchange Commission (SEC) had considered extending capital requirements to derivatives, but such proposals went nowhere, and Wall Street lobbied to prevent any regulation of derivatives. Then in December 2000, in his final weeks in office, Bill Clinton signed into law the Commodity Futures Modernization Act, which shielded the markets for derivatives from Federal regulation.]

While acknowledging that the U.S. automotive retail industry is definitely recession-vulnerable, predicting the start of the next recession is impossible although eventually there will be one, I intend for now to keep and vigilantly watch my current Carvana stock holdings and perhaps accumulate more when attractive buying opportunities occur.


3) What is the potential for international expansion?

For now and the near future, Carvana is completely focused on only domestic expansion as the leading disrupter in the gigantic retail used vehicle market.

In my OP, there are several typos in the table under Corporate Financials:

• The date under the Carvana heading should be 2/27/19

• Price change 52-wk should be 91.1% instead of 170.1%.



Without getting into the details, it seems to me that the big difference between this and scary references to the mortgage crisis 10 years ago is that we don’t have 10% increases of the value of the same car per year (but rather depreciation). So, even if there is some repeat of extending loans to people who can’t really afford the purchase for one reason or another, one can at least repossess the car and get most or all of the value back. With houses, once there was the turn in the market, many of the houses were worth much less than the balance on the loan. With cars, this is unlikely.

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Topic: Car ownership vs. Lyft and other TaaS…

Lyft S-1 introduction:


Lyft started a movement to revolutionize transportation. In 2012, we launched our peer-to-peer marketplace for on-demand ridesharing and have continued to pioneer innovations aligned with our mission. Today, Lyft is one of the largest and fastest-growing multimodal transportation networks in the United States and Canada. To date, we have facilitated over one billion rides.

We believe that cities should be built for people, not cars. Mass car ownership in the twentieth century brought unprecedented freedom to individuals and spurred significant economic growth. However, in the process, city infrastructure became overwhelmingly devoted to cars. Roads and parking lots have replaced too much green space. Mass car ownership strains our cities and reduces the very freedom that cars once provided.

Car ownership has also economically burdened consumers. U.S. households spend more on transportation than on any expenditure other than housing.1 In the United States alone, consumers spend over $1.2 trillion annually on personal transportation.2 On a per household basis, the average annual spend on transportation is over $9,500, with the substantial majority spent on car ownership and operation.3 Yet, the average car is utilized only five percent of the time and remains parked and unused the other 95%.4

Consumers are seeking better ways to get around. They have grown accustomed to the convenience and immediacy of the on-demand economy and expect their experiences to be more simple and enjoyable. Existing transportation options have failed to meet this shift in consumer demand, creating the opportunity for a better solution.

We believe that the world is at the beginning of a shift away from car ownership to Transportation-as-a-Service, or TaaS. Lyft is at the forefront of this massive societal change. Our ridesharing marketplace connects drivers with riders and we estimate it is available to over 95% of the U.S. population, as well as in select cities in Canada. In 2018, almost half of our riders reported that they use their cars less because of Lyft, and 22% reported that owning a car has become less important.5 As this evolution continues, we believe there is a massive opportunity for us to improve the lives of our riders by connecting them to more affordable and convenient transportation options.

Business Insider Article:

Carpocalypse now: Lyft’s founders are right — we’re in the endgame for cars

*The Lyft IPO is all about destroying car ownership as we know it.

*Car sales in Britain declined 18.2% in January. It was the eighth successive month of decline.

*Sales in Turkey declined 60%.

*Europe-wide, sales are down around 6%.

*In the US, total car registrations have declined by about 10%

*Tire sales - a proxy for vehicle production - are down in China, too.

*People just don’t want cars that much anymore. Uber and Lyft are reducing the need for new cars. Automobiles could be entering an historic decline.…

One of the top principles mentioned in Saul’s knowledge base (I am going off of memory, so I hope I have this right! If not, it is still one of my own principles for investing)) is to invest in company stock with the idea that you will hold indefinitely. Given the upward trends in car-sharing services in US and globally and the recent trends of falling car sales in US and other countries detailed in the Business Insider article, I have a hard time thinking that the long-term business outlook in used car sales, whether on lots or through software solutions, will be good. In the mid-term, a glut of used cars could be possible; in the long-term, the TAM may decline precipitously. So while there may be gains in the short-term, I can 't see how this company can thrive over time.


Best, Swift…
No position CVNA