CVNA TWLO top price & revenue gainers

Carvana (CVNA) and Twilio (TWLO), my top price AND revenue gainers

I currently have two extraordinary holdings - Carvana (CVNA) and Twilio (TWLO) - that have gone bonkers year-over-year and year-to-date, that is, substantial appreciation in stock prices along with high octane growth in revenues.

Thanks to Saul, who re-invested in TWLO back in January 2018, I shortly thereafter in February made my initial TWLO investment after conducting my due diligence that included reviewing past TWLO posts here and at the New Paradigm Investing Board to allay my Uber concerns among others. About the same time, while conducting my due diligence on CarGurus (CARG), an information technology company with recurrent revenue (see my post here… ), I came across Carvana that was in a completely different sector (Consumer Discretionary) and industry (Automotive Retail). A quick look see of Carvana made my eyes pop wide open that lead to a follow-up in-depth due diligence and initial investment. Little did I know back then that Carvana would realize triple digit price gains for year-to-date and the recent 52-week period along with TWLO.


Not even in the information technology sector of TWLO, Carvana, an e-Commerce platform for buying used cars in the automobile industry of the consumer discretionary sector, has realized as of 11/21/18 an extraordinary high 170% price gain over the recent 52-week period versus 193% for TWLO as shown at the following Big Chart website.

Year-to-date price gains as of 11/21/18 show 118% for Carvana versus 226% for TWLO in spite of recent significant pullbacks in stock price from Y-T-D highs for both, followed by substantial one-day double digit price rebounds upward after releasing excellent quarterly performances as shown at the following Big Chart website.

On 9/12/18, Carvana hit its Y-T-D high of $72.59/share, a whopping gain of almost 280%. Realizing that $72.59 was overpriced and would be unsustainable, I, thereafter, decided to reap a substantial part of my gains by reducing my CVNA holdings in several family accounts during the ensuing pullback in stock price. Prior to the Carvana release of Q3 results on 11/7/18, I bought CVNA shares when the price dropped to the $36-$38 range in late October. After release of excellent results for Q3, CVNA shares spiked upward to a high of $54.98 and, since then, has returned to the 40s. Overall, CVNA realized a 43% drop from its $72.59 Y-T-D high on 9/12/18, to its $41.68 current price as of 11/21/18.

TWLO hit its Y-T-D high of $98.89 on 11/8/18, after release of excellent 3Q financial results, and, thereafter, has pulled back to its $76.96 current price on 11/21/18, a drop of 22%.



Since Q1 2014, Carvana has realized phenomenal mind-blowing gains in quarterly revenue, sequentially and year-over-year. As shown in the following comparison table, beginning at Q1 2015, Carvana quarterly revenues at least tripled year-over-year for 6 consecutive quarters through Q2 2016, and, thereafter, at least doubled for 9 consecutive quarters through Q3 2018. Twilio’s year-over-year gains in quarterly revenue are excellent for my satisfaction, but look anemic and pale in comparison with those of Carvana. Carvana corporate guidance expects its streak of 15 consecutive quarters with year-over-year triple digit percentage gains in revenue to continue, projecting year-over-year revenue gains of 115% -138% for the next Q4 2018 and 126%-133% for FY 2018.

**CARVANA		        TWILIO**
**FY/QTR       REVENUE	  Change       REVENUE	Change**
**($ M)	     YoY	 ($ M)	 YoY**

FY '18E  1,949-2,000   126%-133%

Q4 '18E      570-630   115%-138%

Q3 '18	       534.9	    137%	168.9    68%
Q2 '18	       475.3	    127%	147.8	 54%
Q1 '18	       360.4	    127%	129.1	 48%
FY 2017	       858.9	    135%	399.0	 44%
Q4 '17	       265.1	    148%	115.2	 41%
Q3 '17	       225.4	    128%	100.5	 41%
Q2 '17	       209.4	    142%	 95.9	 49%
Q1 '17	       159.1	    118%	 87.4	 47%
FY 2016	       365.1	    180%	277.3	 66%
Q4 '16	       106.8	    151%	 82.0	 60%
Q3 '16	        98.8	    177%	 71.5	 62%
Q2 '16	        86.5	    202%	 64.5	 70%
Q1 '16	        73.0	    238%	 59.3	 78%
FY 2015	       130.4	    213%	166.9	 88%
Q4 '15	        42.5	    201%	 51.3	
Q3 '15	        35.7	    202%	 44.3	
Q2 '15	        28.6	    203%	 38.0	
Q1 '15	        21.6	    243%	 33.4	
FY 2014	        41.7		         88.8			

Q4 '14	        14.1
Q3 '14	        11.8
Q2 '14	         9.4
Q1 '14	         6.3



Depending on where you live, especially in States along the U.S. East Coast, in the U.S. Southeast and U.S. Sunbelt, stretching from Georgia to California, you most likely have seen many televised Carvana commercials. If not, you might have seen Carvana’s collaboration with The Walt Disney Company, kicking off national TV advertising for the highly anticipated Disney movie, “Ralph Breaks the Internet,” hitting theaters on Nov. 21, with a :30 commercial that combines animation and live-action footage, following Ralph and Vanellope as they go on a shopping spree through the internet and wind up with more than they bargained for: .
Carvana and the characters from Disney’s “Ralph Breaks the Internet” are joining forces throughout a multi-channel campaign to highlight just how fun it can be to buy your car online in as little as 10 minutes and have it delivered to your door as soon as the next day. If Ralph and Vanellope can do it, so can you! BTW, on Sunday, I saw and enjoyed this movie in which the Cavana logo appeared briefly among giants like eBay, Google and Facebook; during the movie, there were more chuckles and laughter from adults than the kids; the movie hauled in $84.5 million, the all-time second largest Thanksgiving weekend opening.

For a quick overview of Carvana, I highly recommend taking a look at the company’s website presentation “Introduction to Carvana” dated June 2018.…

Carvana is a leading e-Commerce platform for buying used cars. It is transforming the used car buying experience by giving consumers what they want — a wide selection, great value and quality, transparent pricing and a simple, no-pressure transaction. Each element of its business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.

Carvana provides a refreshingly different and convenient car buying experience that can save buyers time and money. On its platform, consumers can research and identify a vehicle, inspect it using Carvana’s proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle, and schedule delivery or pick-up, all from their desktop or mobile devices. Carvana transaction technologies and online platform transform a traditionally time consuming process by allowing customers to secure financing, complete a purchase and schedule delivery online in as little as 10 minutes.

Carvana’s technology and infrastructure allow it to seamlessly and cost efficiently deliver this car buying experience to its customers. Carvana uses proprietary algorithms to optimize its nationally pooled inventory of around 10,000 vehicles, inspect and recondition its vehicles based on our 150-point inspection process and operate its own logistics network to deliver cars directly to customers as soon as the next day. Customers in certain markets also have the option to pick up their vehicle at one of Carvana’s proprietary vending machines, which provides an exciting pick-up experience for the customer while decreasing the company’s variable costs, increasing scalability and building brand awareness.

The automotive retail industry’s structure presents an opportunity for disruption. It is the largest consumer retail industry in the United States and is highly fragmented. According to the U.S. Census Bureau, the U.S. automotive industry generated approximately $1.2 trillion in sales in 2017, while estimates the U.S. used vehicle sales market at over $739 billion in 2016. With little brand differentiation, there are approximately 43,000 used car dealerships in the U.S. according to Borrell Associates’ 2017 Outlook and the largest dealer brand commands approximately 1.7% of the U.S. market according to and publicly-listed dealership filings. Additionally, consumers are often dissatisfied with the car buying process. According to the DealerSocket 2016 Independent Dealership Action Report (“DealerSocket 2016”), 81% of North American consumers do not enjoy the car buying process, and car salesmen are among the least trusted professionals, according to a 2016 Gallup poll.

As a first mover on the e-Commerce platform and disruptor in the used car retail sector, Carvana has demonstrated that its custom-built business model can capitalize on this opportunity. Carvana sales have grown as it has added new markets and increased its market penetration in its current markets. As of 9/30/18, the Carvana in-house distribution network services 78 metropolitan markets, and the company plans to continue to expand their network into additional markets.


Excerpts from the latest Q3 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

The following are my comments:

Given this board’s current focus on primarily software companies with recurrent revenues (e.g., SaaS models), higher margins, no capital intensity and no dependence on selling things, Saul recently and appropriately opined on hardware stocks: Then there’s the question of increasing your revenue. To put it simply: if you sell $100 million of refrigerators this year, to increase revenue by 50% next year, you have to sell the same number of refrigerators, and then half again more. And to increase 50% the year after, you have to sell as many as you did the first year plus 125% more. It’s clearly impossible to do that even for 4 or 5 years in hardware, unless you invent something that changes the planet, like the iPhone.

Carvana, however, 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 as shown in the following table. I’ve also included the latest corporate guidance figures for Q4 E 2018 and FY 2018 E.

**CARVANA     REVENUE    Change	NO. OF 	Change	  VEHICLE 	 Change	    VEHICLE 	Change**

**FY '18E	1,949-2,000  126%-133%	  84	 90.9%	93,858-96,358	112%-118%     NA**	
Q4 ’18E	  570 - 630  115%-138%	  84	 90.9%	27,500-30,000	103%-122%     NA	
Q3 ‘18	    534.921     137.3%	  78	100.0%	    25,324	 116.1%	     4,408	145.3%
Q2 ’18	    475.286	127.0%	  65	116.7%	    22,570	 111.3%	     3,658	131.5%
Q1 ‘18	    360.422	126.6%	  56	143.5%	    18,464	 121.6%	     2,342	 81.8%

**FY 2017	    858.870	135.2%	  44	109.5%	    44,252	 135.9%	     6,509	145.5%**
Q4 ‘17	    265.053	148.1%	  44	109.5%	    13,517	 141.4%	     1,844	152.3%
Q3 ‘17	    225.379	128.0%	  39	143.8%	    11,719	 133.3%	     1,797	128.3%
Q2 ‘17	    209.365	142.0%	  30	114.3%	    10,682	 145.3%	     1,580	151.2%
Q1 ‘17	    159.073	118.1%	  23	109.1%	     8,334	 120.3%	     1,288	155.6%

**FY 2016	    365.148	180.0%	  21	133.3%	    18,761	 187.6%	     2,651	147.8%**
Q4 ‘16	    106.827	151.3%	  21	133.3%	     5,600	 155.5%	       731	
Q3 ‘16	     98.844	177.1%	  16	220.0%	     5,023	 182.8%	       787	
Q2 ‘16	     86.526	202.5%	  14	180.0%	     4,355	 224.3%	       629	
Q1 ‘16	     72.951	237.7%	  11	175.0%	     3,783	 212.1%	       504	

**FY 2015	    130.392	212.8%	   9	200.0%	     6,523	 209.9%	     1,070**
Q4 ‘15	     42.514	200.7%	   9	200.0%	     2,192	 182.8%		
Q3 ‘15	     35.668	202.4%	   5	 66.7%	     1,776	 206.7%		
Q2 ’15	     28.607	202.8%	   5	150.0%	     1,343	 208.0%		
Q1 ‘15	     21.603	243.0%	   4	300.0%	     1,212	 284.8%		

**FY 2014	     41.679	806.1%	   3		     2,105		       137**
Q4 ‘14	     14.137		   3		       775			
Q3 ‘14	     11.795		   3		       579			
Q2 ’14	      9.449		   2		       436			
Q1 ’14	      6.298		   1		       315			

**FY 2013	      4.600**

For a complete list of Carvana market opening history, estimated populations, and estimated total industry used vehicle sales by market, go to the following website and click “Carvana Market Launch Dates and Estimates of Population.”

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

The following are Carvana excerpts:

We achieved our highest ever quarterly total GPU in Q3 giving us a clear line of sight to our $3,000 mid-term 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. [see “Corporate Management” section of this post for more details about the gift]

o Total GPU (incl. Gift): $2,263 vs. $1,742 in Q3 2017
o Total GPU ex-Gift: $2,302 vs. $1,742 in Q3 2017, on the higher end of our previously given guidance of $2,100-$2,350 in the Q2 shareholder letter

o Retail GPU (incl. Gift): $1,127 vs. $841 in Q3 2017
o Retail GPU ex-Gift: $1,166 vs. $841 in Q3 2017
o Gains in retail vehicle GPU were primarily driven by lower average days to sale, which declined from 97 to 63

o Wholesale GPU (incl. Gift) was $61 vs. $64 in Q3 2017
o Wholesale GPU ex-Gift was $62 vs. $64 in Q3 2017
o Changes in wholesale GPU were driven by higher wholesale unit volume (+145%) relative to retail units (+116%), offset by lower gross profit per wholesale unit sold ($350 incl. Gift and $355 ex-Gift vs. $418 in Q3 2017).

o Other GPU was $1,075 vs. $837 in Q3 2017
o Gains in Other GPU were driven by the $4 million fee we received in the quarter for facilitating the refinancing of a previously sold pool of finance receivables, increased attachment of VSC aided by recent improvements to our merchandising, and expanding our offering of GAP waiver coverage

Objective #3: Demonstrate Operating Leverage

The following are Carvana excerpts:

In Q3 we achieved significant operating leverage despite our continued investment in technology, infrastructure, and people to support our business’ triple-digit unit and revenue growth. Total SG& A (incl. Gift) was 21.6% of revenue in Q3, and total SG& A ex-Gift, which excludes expenses related to the 100k Milestone Gift, as a percent of revenue improved to 20.4% in Q3, compared to 26.0% in Q3 2017. We reduced SG& A (incl. Gift) by $435 per unit, and reduced SG& A ex- Gift by $702 per unit, specifically $236 in advertising and $466 in non-advertising SG& A ex-Gift.
The decline in advertising expense was primarily driven by strong leverage in our existing markets. Additionally, our new markets are launching with lower initial customer acquisition costs reducing the drag on corporate advertising expense per unit from new market launches. We expect similar dynamics to occur in the future as older markets continue to leverage, new markets launch at lower initial costs, and as the mix of markets shifts toward older markets.
Our net loss (incl. Gift) for the quarter was $64.4 million, as compared to $39.8 million in Q3 2017 and $51.3 million last quarter.
We consider EBITDA margin ex-Gift an important measure of the leverage in our business. EBITDA margin ex-Gift in Q3 2018 was (8.3%), an improvement from (15.9%) in Q3 2017 and (8.8%) last quarter. Our margin improvement was driven by gains in GPU along with leveraging our fixed costs in both compensation and Other SG& A despite supporting triple-digit unit and revenue growth, while also leveraging our advertising expenses. In two of the past three years we de-levered in Q4 due to normal seasonality, and expect to do so again this year due primarily to our investments to prepare for growth in the first half next year and our acquisition of Propel.

As an excellent summary, on the recent Q3 2018 earnings conference call, Carvana co-founder and CEO Ernie Garcia reported (my emphasis in bold):

We had our nineteenth straight quarter of triple digit growth in units and revenue in the third quarter. To illustrate the power of that compounding growth, we delivered more cars to our customers in the third quarter alone than we did in all of 2015 and 2016 combined. During the third quarter we continued to meaningfully expand our population coverage and importantly we continued to see strong trends in market share penetration across our markets.

The demand we’re observing on our execution date has only resulted in even greater optimism about the future we see in front of us. And progress we’ve made in Gross Profit per Unit (GPU) results are very exciting and likes the path of profitability more clearly than ever before. In the third quarter our GPU surpassed the SG&A per unit of many traditional used automotive retailers. The implications there are significant and it deserves a moment of concentration. It’s a powerful step and it’s just one of the steps along the way.

Our mid-term goal of $3,000 is clearly in sight and we’re beginning to get more concrete visibility beyond 3,000. This will among the topics we will hit during our Analyst Day on the 29. We also continued our remarkable profitability on our expense line items even with our efforts to alleviate demand generated pinch points in the business and our investments in additional scalabilities to prepare for 2019.

Top end of our guidance ranges in both units and revenue and also comfortably beat our GPU and EBITDA margin targets. This was driven by stronger-than-anticipated top and mid-funnel demand as well as strong execution across the business. SG&A per unit decreased by $702 year-over-year with about $230 coming from the leverage in customer acquisition cost and the remainder coming from non-advertising SG&A. This allowed us to achieve 8.3% EBITDA margin for the quarter reducing those walkers by over 750 basis points year-over-year.

We continue to invest in technology that we believe will further differentiate the quality experience we’re able to provide to our customers.

One visual kind of this is the acquisition of Propel AI, which we completed yesterday. Propel is an artificial intelligence powered communication platform that delivers automated conversations with customers via SMS, email and onsite chat. We expect this technology to improve our customer experiences further and make us more efficient overtime as it rolls out and is integrated into our platform.

As part of this acquisition we gained a highly experienced product and technology team that we’re excited about and they will be joining Carvana fulltime. One of these leaders is Tom Taira, Cofounder and Ex Chief Product Officer at TrueCar.”



Carvana does not meet fully this Saul criterion:
Tied for Third, I look for recurrent revenue. I want my company to have last year’s revenue repeating this year and building from there, and not a company that has to go out and grow by selling the whole thing over again. God, this is important! It usually means software, and a SaaS model, and NOT selling things. You just can’t keep growing at 40% selling things. And when an economic slowdown hits, people will put off buying a new car, or a new house, but companies won’t tear out the software that keeps their company going. Software also usually means not capital intensive, and it also means high gross margins.

Although Carvana (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 over a period of 19 straight quarters has realized Y-o-Y triple digit growth in revenue, used car units sold and number of new markets entered as previously mention and shown below.

**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**

11/21/18 6.300 B                                                                                  41.68
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)	  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																								       					

Carvana Used Car Vending Machines

Standing nine stories high, the all-glass tower holds up to 34 vehicles and provides a fun, unique way to pick up vehicles purchased on Here’s an excellent TV MotorWeek program video, featuring the Carvana vending machine:
On October 9, 2018, the U.S. Patent Office granted Carvana a utility patent on their Car Vending Machines, and Carvana expects the Patent Office to issue a design patent in the next few weeks, reinforcing the uniqueness of the Car Vending Machines and the distinctiveness of the Carvana brand.

The vending machine tower is Carvana’s highly visible marketing icon located currently in the following 14 major metropolitan markets: Houston, Austin, San Antonio and Dallas (Texas); Nashville (Tennessee); Raleigh and Charlotte (North Carolina); Jacksonville, Tampa and Orlando (Florida) and Gaithersburg (Maryland/Washington, D.C.); Tempe (Phoenix, Arizona); Cleveland (Ohio); and Philadelphia ¶.

The following table shows the quarterly cumulative addition/growth of these vending machines.

Q3 '18: 14
Q2 ’18: 12
Q1 ’18:  8

2017:    7
2016:    2
2015:    1

Customers who visit can shop more than 10,000 vehicles, finance, purchase and even sell their current vehicle to Carvana in as little as 10 minutes. Then, simply schedule as-soon-as-next-day Car Vending Machine pickup or home delivery. Customers who choose Car Vending Machine pickup receive a commemorative, oversized Carvana coin, which activates the vending process. Once the vehicle is vended into the delivery bay, the customer can do a walk-around of the vehicle and sign off on the last few documents. Every Carvana vehicle comes with a seven-day return policy, giving customers the chance to see if the vehicle really fits their life.

Total Inspection & Reconditioning Centers (IRCs)

Carvana currently has an inventory of around 10,000 used vehicles, all of which are inspected and reconditioned before resale. Carvana currently has four IRCs, located across the U.S. in Winder, Georgia; Blue Mound, Texas; Tolleson, Arizona; and Delanco, New Jersey. A fifth inspection and reconditioning center located on a 70-acre site in Indianapolis remains on schedule to begin vehicle production around the new year.
All Carvana vehicles are Carvana Certified, meaning they have passed a rigorous 150-point inspection, have never been in a reported accident, and have no frame damage. Features, imperfections and updated information about open safety recalls are listed on every car’s vehicle description page.
Here’s a video about operations of the IRC in Tolleson, Arizona in the Phoenix area.

Carvana reported the following:

During our growth phase, our highest priority will continue to be generating demand and building an infrastructure to support growth in retail units sold. Secondarily, we plan to pursue several strategies designed to increase our total gross profit per unit. These strategies include the following:
• Reduce average days to sale. Our goal is to increase both our number of markets and our sales growth at a faster rate than we increase our inventory size, which we believe would decrease average days to sale due to a relative increase in demand versus supply. Reductions in average days to sale lead to fewer vehicle price reductions, and therefore higher average selling prices, other factors being equal. Higher average selling prices in turn lead to higher gross profit per unit sold, all other factors being equal.
• Leverage existing IRC infrastructure. As we scale, we intend to more fully utilize the capacity in our four existing IRCs, which collectively have capacity to inspect and recondition approximately 200,000 vehicles per year.
• Increase utilization on logistics network. As we scale, we intend to more fully utilize our in-house logistics network to transport cars to our Inspection & Reconditioning Centers (IRCs) after acquisition from wholesale auctions or customers.
• Increase conversion on existing products. We plan to continue to improve our website to highlight the benefits of our complementary product offerings, including financing, VSCs, GAP waiver coverage and trade-ins.
• Add new products and services. We plan to utilize our online sales platform to offer additional complementary products and services to our customers.
• Optimize purchasing and pricing. We are constantly improving the ways in which we predict customer demand, value vehicles sight unseen and optimize what we pay to acquire those vehicles. We also regularly test different pricing of our products, including vehicle sticker prices, trade-in offers and ancillary product prices and believe we can improve by further optimizing prices over time.


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


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.

Free Cash Flow

During its growth phase, Carvana’s highest priority will continue to be generating demand and building an infrastructure to support growth in retail units sold.

**Cash Flow    Capital**
**FY/QTR	From Ops   Expenditure    FCF**
**($M)	      ($M)	 ($M)**

Q3 '18	 (84.39)     (33.80)	(118.19)	
Q2 '18	( 48.04)     (45.41)	( 93.45)
Q1 '18	(131.45)     (28.01)	(159.46)
FY '17	(199.92)     (78.49)    (278.41)
Q4 '17	( 83.91)     (19.08)	(102.99)
Q3 '17	( 54.72)     (16.83)	( 71.56)
Q2 '17	(  8.41)     (24.02)    ( 32.43)
Q1 '17	  NA 	      NA          NA
FY '16	(240.29)     (39.54)    (279.76)			
FY '15	( 53.51)     (13.95)    ( 67.46)



SBC/revenue ratios are favorably low.

**PERIOD	 SBC	SBC/Revenue** 
**($ M)**		       
Q3 '18 13.800      2.6%			
Q2 ‘18	2.580	   0.5%	      
Q1 ‘18	1.510	   0.4%	      
FY '17	5.611	   0.7%	      
FY '16	0.555	   0.2%	      
FY '15	0.490	   0.4%	      




Carvana launched 13 new markets in the third quarter, bringing its total markets to 78 as of September 30, 2018. Its Q3 markets continued to increase the Carvana network’s density, as it largely launched markets near its existing footprint. This increases the total percentage of the U.S. population its markets collectively serve to 55.8%, up from 52.8% at the end of Q2 2018. Carvana also opened 2 vending machines in the quarter in Cleveland and Philadelphia. The company is excited by its positive trends in new and existing markets, including rising GPU and falling advertising expense per unit, and looks forward to bringing its full offering to many more customers by continuing to open markets at a rapid pace.
The Indianapolis inspection and reconditioning center (IRC) remains on schedule to begin vehicle production around the new year. As part of its expansion plan Carvana expects to continue opening IRCs to support demand growth and its national coverage. Opening new IRCs enables the company to increase the selection of cars available to its customers and decrease the distance from its customers to the nearest IRC.
For a complete list of Carvana market opening history, estimated populations, and estimated total industry used vehicle sales by market, go to the following website and click “Carvana Market Launch Dates and Estimates of Population.”

Here’s the upbeat Carvana guidance for Q4 2018 and FY 2018:

**Q4 ’18 GUIDANCE**		
Retail unit sales	     27,500 - 30,000	 Increase of 103% - 122%
Total Revenue	             $570 M - $630 M	 Increase of  115% - 138%
Total Gross Profit per unit  $2,000 - $2,350	 Increase from $1,619
EBITDA margin	            (10.5%) - (8.5%)	 Improvement from (15.5%)

**FY 2018 GUIDANCE**	   	
Retail unit sales	     93,858 - 95,500	 Increase of 112% - 118% 
Total Revenue	            $1.94 B - $2.0 B	 Increase of 126% - $133%
Total Gross Profit per unit  $2,100 - $2,175	 Increase from $1,539
EBITDA margin	             (9.8%) - (9.2%)	 Improvement from (16.9%)
Market openings	                   40	         Increase from 23 market openings in 2017, bringing
		                                 our end-of-year total to 84 markets and our
                                                 total U.S. population coverage to at least 57%



In the following table, I’ve compared Carvana with two automotive retail competitors - CarMax (KMX) and AutoNation (AN) - and also with my holding in CarGurus (CARG), an information technology company that is a global online automotive marketplace connecting buyers and sellers of new and used cars. CarMax is the nation’s largest retailer of used vehicles, operating 195 stores in 41 states, retailing 721,512 retail units during the fiscal year ended 2/28/2018 and selling 408,509 wholesale units at its in-store auctions. AutoNation is the nation’s largest automotive dealer of primarily new vehicles (56.6% of 2017 revenue), used vehicles (22.7%) and parts & service (15.8%), owning and operating 360 new vehicle franchises from 253 stores located in the U.S. predominantly in major metropolitan markets in the U.S. Sunbelt region, and owning and operating 76 AutoNation-branded collusion centers. In FY2017, AN sold a grand total of 563,264 retail vehicle units, consisting of 329,116 new vehicle units and 234,148 used vehicle units.

**CARVANA	             CARMAX	           AUTO NATION            CARGURUS**
	                   11/21/18	            11/21/18	             11/21/18             11/21/18
GICS SECTOR	  Consumer Discretionary   Consumer Discretionary   Consumer Discretionary       Information
GISC INDUSTRY	     Automotive Retail	      Automotive Retail	       Automotive Retail   Internet Software & Services
MARKET CAP	           $  6.30 B	           $ 10.91 B	             $ 3.34 B            $4.21 B
Employees	              1,864	             25,000	              26,000               549
TOTAL REVENUE (ttm)	     1.64 B	             18.66 B	              21.68 B           418.66 M

• Used Vehicle               44,252                 721,512                 234,148
• New Vehicle                     0                       0                 329,116

RETAIL STORES                     0                     195                     253
52-WK HIGH	              72.59	              81.67	              62.02              57.25
PRICE/SHARE 	              41.68	              62.46	              37.09              38.29
52-WK LOW	              15.20	              57.05	              36.41              28.00
Price Y-T-D change	     117.9%	              (2.6%)	             (27.7%)             27.7%
Price change 52-wk	     170.1%	              (8.2%)	             (29.4%)             33.6%
S&P 500 52-wk change	       1.5%	               1.5%	               1.5%               1.5%

EV/EBITDA (mrq)	             -13.76	              18.77	              10.05             296.08
P/E (ttm)	                N/A	              15.49	               7.48              84.71
Fwd P/E	                     -41.27	              12.39	               8.05             103.49
EV/Revenue (ttm)	       1.45	               1.31	               0.44               9.85
P/S (ttm)	               3.85	               0.58	               0.15              10.07
Gross Margin - FY 2017	       7.9%	              13.6%	              15.6%              94.4%
Operating Margin - FY 2017   (18.1%)	               4.2%	               3.9%               6.4%
Net Margin - FY 2017	      (7.3%)	               3.9%	               2.1%               5.0%

Highlights from the above comparison table:
• With its total commitment to an e-Commerce platform, Carvana needs far less employees and has no need for retail stores;
• Carvana is current running in the red, given its commitment and priority to rapidly expand and provide supporting infrastructure.
• Carvana is superbly outperforming its two larger brethren KMX and AN with outrageous price gains of 117.9% and 170.1% for Y-T-D and recent 52-week period, respectively. Carvana also is substantially outperforming CarGurus.
• Carvana has acceptable EV/Revenue and P/S ratios.

Carvana continues to maintain a solid capital structure during its explosive rapid growth phase.

**CAPITAL STRUCTURE	      CARVANA	             CARMAX	        AUTO NATION             CARGURUS**
                              Q2 2018               Q2 2018                 Q2 2018              Q2 2018
Cash & equivalents        $ 199.192 M	         $ 37.147 M	           $ 69.2 M           $ 31.762 M
Working Capital           $ 204.669 M	      $ 1,738.629 M	         $ (838.2 M)         $ 113.735 M
Current Ratio   	      1.47	            2.35	              0.85               3.25
Long-Term Debt   	   $ 76.873 M	        $ 840.187 M	          $ 414.5 M              O
Stockholders’ Equity      $ 359.109 M	      $ 3,482.118 M	        $ 2,369.3 M          $ 156.391 M
LT Debt/Equity   	     21.4%	           24.1%	             17.5%               0%



In 2012, Carvana was co-founded by Ernie Garcia, III (Board Chairman, President & CEO), Benjamin Huston (Chief Operating Officer) and Ryan Keeton (Chief Brand Officer) with headquarters in Tempe, Arizona. Carvana’s top executive management team is relatively young, well-educated (primarily Stanford and/or Harvard), experienced and focused on disrupting and transforming the retail used car sector with their company’s custom-built business model and e-Commerce platform.

At present, the insider ownership is 21.41% with major shareholder Ernest C. Garcia II (the father of CEO Ernie Garcia III) holding 52,937,458 shares. Ernest Garcia II is a self-made billionaire (rank #127 on Forbes list of 400 of the the Wealthiest Americans with a real time net worth of $3.8 billion), who currently owns and runs DriveTime Automotive, the nation’s 4th biggest used car retailer.…
[Here is some full-disclosure background about Ernest Garcia II’s remarkable rebound from failure to a self-made billionaire. In October 1990, Garcia, then a Tucson-based real estate developer pleaded guilty to bank fraud, following the failure of Charles Keating’s Lincoln Savings and Loan Association. Garcia "fraudulently obtained a $30-million line of credit in a series of transactions that also helped Lincoln hide its ownership in risky desert Arizona land from regulators.” Garcia spent three years on probation, and he and his firm filed for bankruptcy. In 1991, he bought Ugly Duckling, a bankrupt rent-a-car franchise, for under $1 million and merged it with his own fledgling finance company, and turned it into a company selling and financing used cars for sub-prime buyers with poor credit history. Fast forward 27 years, he’s now the nation’s 4th largest used car retailer. In 2002, the Ugly Duckling name was changed to DriveTime Automotive.]

Carvana was founded by Garcia’s son, Ernie Garcia III, as a subsidiary of DriveTime Automotive and was later spun out. This explains why Carvana, a Tempe, Arizona based company, chose Atlanta, Georgia as its first market to target and penetrate.

Initial Public Offering

On 4/28/2017, Carvana went public, pricing its shares at $15, ahead of the IPO. CVNA opened down at $13.50/share and closed its first trading day down at $11.10. On May 3, 2017, Carvana Co. completed its IPO of 15.0 million shares of Class A common stock at a public offering price of $15.00 per share. Carvana Co. received approximately $205.8 million in proceeds, net of underwriting discounts and commissions and offering expenses. Carvana Co. used the proceeds to purchase approximately 18.8 million newly-issued membership interests of Carvana Group at a price per unit equal to 0.8 times the initial public offering price less underwriting discounts and commissions. In connection with the IPO, Carvana Co. transferred approximately 0.2 million Class A Units to Ernest Garcia, II in exchange for his 0.1% ownership interest in Carvana, LLC, a majority-owned subsidiary of Carvana Group. After the transfer Carvana Co. owned approximately 18.6 million Class A units.

Ernie’s 100k Milestone Gift to Carvana Employees

In recognition of Carvana selling its 100,000th vehicle, CEO Ernie Garcia III recently committed to give each current employee 165 shares of his personal stock once they reach their one-year employment anniversary, a gift worth up to $35 million at the announcement date’s stock price. Garcia commented:

“I believe we are building something special at Carvana. We have accomplished a lot and all that achievement points to even greater opportunity. Getting to where we are today in less than 6 years has taken a differentiated level of effort from a lot of people. Getting where we want to go is going to take more of the same. It can get easy to zoom in too far, too fast and lose sight of what really matters. In the long run, I believe what matters most is that we have a concept that makes our customers’ lives a little bit better, that we attract and retain great people, and that those people care about what they are doing. We have great people. And they care. We wouldn’t be where we are today without them and I certainly wouldn’t be where I am. In recognition of that fact and in alignment with our value ‘We’re All in this Together’, the right thing to do was to give some of my shares to all the people that have fought for our customers to get us here and that are going to keep fighting to get us where we are going.”

In light of administrative and tax efficiency considerations, we are structuring this donation as restricted stock unit (“RSU”) grant awards from the Company to employees over the next several quarters as they become eligible, which awards have been and will be paired with equivalent contributions of personal stock from Ernie to the Company (collectively, the “100k Milestone Gift”). Because of Ernie’s matching contributions, we expect the net impact on shares outstanding from the 100k Milestone Gift to be zero, though these non-cash grants will appear as compensation expense each quarter as we grant them to eligible employees, and a portion of the expense will be capitalized into inventory and later recognized within costs of sales.
Throughout the letter we will refer 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. We will also refer to several measures that are presented “ex-Gift,” which exclude the impact of the 100k Milestone Gift to employees and are non-GAAP metrics with reconciliations available at the end of this letter. The compensation expense associated with the 100k Milestone Gift was not incorporated into, or contemplated by, the Q3 2018 and FY 2018 guidance we provided on August 8, 2018, and will not be incorporated into our guidance moving forward. For additional details on the stock gift see “Details on the 100k Milestone Gift” section in the Q3 2018 report.


The U.S. automotive retail industry is gigantic as the largest retail trade sector in the U.S.

According to data in the latest available 2016 Annual Retail Trade Survey 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. as shown in the following table.

2016 Annual Retail Trade Survey
Estimated Annual Sales off U.S. Retail Firms by Kind of Business: 1992-2016

**ANNUAL RETAIL SALES in $ Billion        2016	 2015	  2014	   2013	    2012     2011     2010     2009	2008	 2007**

**TOTAL U.S. RETAIL SALES**	             4,856.3  4,726.0  4,639.4  4,458.5  4,302.2  4,103.0  3,818.0  3,612.5  3,935.3  3,995.2

**MOTOR VEHICLE & PARTS DEALERS**	     1,144.4  1,094.1  1,020.9	  959.3	   886.5    812.9    742.9    671.8    785.9	910.1
• % of Total U.S. Retail Sales	         24%	  23%	   22%	    22%	     21%      20%      19%	19%	 20%	  23%

**TOTAL AUTOMOBILE DEALERS**	       984.4	940.5	 875.6	  819.3	   752.8    684.5    621.2    552.0    649.5	767.4
• % of Motor Vehicle & Parts dealers	 86%	  86%	   86%	    85%	     85%      84%      84%	82%	 83%	  84%
• % of Total U.S. Retail Sales	         20%	  20%	   19%	    18%	     17%      17%      16%	15%	 17%	  19%

**NEW CAR DEALERS**	                       877.7	842.1	 785.1	  735.4	   672.6    608.8    549.5    486.6    575.6	687.7
• % of Total Automobile Dealers 	 89%	  90%	   90%	    90%	     89%      89%      88%      88%	 89%	  90%
• % of Total U.S. Retail Sales	         18%	  18%	   17%	    16%	     16%      15%      14%      13%	 15%	  17%

**USED CAR DEALERS**	               106.7	 98.3	  90.4	   83.9	    80.2     75.7     71.7     65.4	73.9	 79.7
• % of Total Automobile Dealers 	 11%	  10%	   10%	    10%	     11%      11%      12%      12%	 11%	  10%
• % of Total U.S. Retail Sales	          2%	   2%	    2%	     2%	      2%       2%	2%	 2%	  2%	   2%

**AUTO PARTS, ACCESS. & TIRE STORES**       90.5	 89.3	  85.8	   85.0	    84.1     83.0     77.9     74.2	76.3	 74.7
• % of Motor Vehicle & Parts dealers	  8%	   8%	    8%	     9%	      9%      10%      10%      11%	 10%	   8%
• % of Total U.S. Retail Sales	          2%	   2%	    2%	     2%	      2%       2%	2%	 2%	  2%	   2%

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.

The way consumers buy cars is changing rapidly.

Historically, consumers discovered vehicles for sale through local print and broadcast media, as well as word of mouth, and would go to dealerships to educate themselves on potential purchases. Consumers no longer rely solely on traditional media and dealerships to discover and research vehicles. According to the Cars Online 2014 report from Capgemini, 97% of customer vehicle purchases involve online research. In fact, the 2016 Car Buyer Journey report from Autotrader indicates that a typical used car buyer spends approximately nine hours researching his or her prospective car purchase online.

The U.S. retail used car market is huge.

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 collectively hold approximately 7.0% market share, according to, publicly-listed dealership filings and Automotive News.

According to the latest 2017 Used Car Report released by Edmunds, the leading car shopping and information platform, used car sales climbed to an all-time high of 39.2 million vehicles in 2017. This reflects a 1.6 percent increase in sales from 2016 and a 4.3 percent increase from 2012. Analysts at Edmunds attribute this spike to increased replacement demand due to Hurricanes Harvey and Irma and increased used inventory due to a glut of off-lease vehicles hitting the used market in 2017. This large quantity of near-new off-lease models also contributed to a slowing in used-vehicle price growth: Used vehicle prices rose 1.4 percent in 2017, compared to the 3.6 percent average increase between 2012 and 2016.…
For comparison, I’ve added Carvana’s annual used car units sold to the Edmonds table to show (a) Carvana’s share of the total used cars sold annually and (b) identify Carvana’s huge opportunity to penetrate this huge market and expand further its rapidly growing, albeit tiny share.

 **U.S. TOTAL                                      CVNA TOTAL              CVNA % OF**
**YEAR       SOLD     CHANGE        USED   PRE-OWNED         SOLD        CHANGE  USED VEHICLES**
 **(millions)    YoY    (millions)  {millions)     (millions)      YoY       S0LD** 

2017	  39.204      1.6%	 11.462	      2.644      0.044252      135.6%      0.11%
2016	  38.602      3.6%	 11.601	      2.642      0.018761      187.6%      0.05%
2015	  37.255      2.8%	 11.400	      2.533      0.006523      209.9%      0.02%
2014	  36.242      1.3%	 11.178	      2.340      0.002105                  0.01%
2013	  35.776     (4.8%)	 10.793	      2.113
2012	  37.583      1.8%	  9.992	      1.833
2011	  36.921		  9.387	      1.742

Carvana management believes the primary competitive factors in this market include transparency, convenience, price, selection and vehicle quality. Its current competitors can be largely classified into the following segments:

• franchised dealerships – 37% of establishments;
• independent dealerships – 63% of establishments; and
• online dealerships/marketplaces.

A number of used vehicles are also bought and sold through privately negotiated transactions.

With its e-Commerce platform, Carvana has seized the huge opportunity to disrupt the retail used car sector and attract more customers as it continues to grow its operations and expand into new markets.

As previously mentioned, the 2016 annual sales for the business of motor vehicle and parts dealers accounted for $1.144 trillion or 24% of the $4.856 trillion total retail sales in the U.S.

Carvana is in the fledgling e-Commerce business of motor vehicle and parts dealers, which accounted for only 2.8% or $32 billion of the aforementioned $1.144 trillion total. This is highly significant for Carvana because the way consumers buy cars is changing rapidly, and Carvana is currently well positioned strategically to a take full advantage of this and continue to expand and grow as a leading disrupter in the retail used car sector. Carvana’s e-Commerce platform for searching, buying, financing and delivery from a wide selection of used cars readily and conveniently available on hand held devices or desk top computers is a recent radical departure from the staid used car sales lot model where customers “kick the tires” of a limited selection of car or truck models and the ensuing time consuming ‘hem and haw’ retail sale pricing and financing.

e-Commerce is becoming more established, reaching 10.5% of total retail sales in the U.S. in the fourth quarter of 2017 according to the U.S. Census Bureau. Consumers have become more comfortable buying taste-driven, higher-priced products such as consumer electronics and home furnishings online.

Similarly, auto consumers are interested in e-Commerce solutions for their car purchasing needs — 80% of U.S. car buyers would consider completing their entire car purchase online if given the opportunity, according to Capgemini’s 2017 Cars Online Trend Study.

Carvana management believes that its vertically-integrated business model provides a meaningful and sustainable competitive advantage. I agree and, therefore, continue to remain a Carvana investor.

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

One final note of interest. Back in 2015, Forbes published its list of 100 America’s Most Promising Companies (privately-held) that included Carvana ranked #5, The Trade Desk #9, and CarGurus #78.…
I found it amazing how closely together Carvana, The Trade Desk and Twilio have performed in price gains year-to-date as shown at the following Big Chart website:
Just wanted to acknowledge and recognize TTD as another amazing top performer held by board members here. BTW, I still highly favor and hold the “laggard” CARG on the chart.



Thanks! Don’t have any cash rattling around but I did buy 1 share of each, CRVN and CARG, to keep an eye on them.

If they go up I will buy you a dinner at McDonalds!

1 Like

It is transforming the used car buying experience by giving consumers what they want — a wide selection, great value and quality, transparent pricing and a simple, no-pressure transaction. that would seem to be revolutionary both in the used car and new car business. Which at heart (possible exception Tesla) is based on selling what you got or what you want to produce , not on what people want to buy…