2. Carvana Co. (NYSE:CVNA)
Year-to-Date Performance as of September 23: 229.58%
Market Cap as of September 23: $21.61 billion
Number of Hedge Fund Holders: 61
Carvana Co. (NYSE:CVNA) is an online used car retailer, and the fastest-growing online used car dealer in the US, known for its glass tower “car vending machines”. It offers a fully online platform where customers can browse, select, finance, and purchase a used car without ever stepping foot in a dealership. It is also known for its signature “as-seen-on-TV” car vending machines, where customers can drive off the lot with their new car, making the car-buying process transparent, convenient, and hassle-free.
The company’s slowdown in retail sales growth was a strategic move to focus on more profitable sales. This strategy has resulted in a significant increase in Gross Profit Per Unit (GPU), reaching a new record of $5,500 in 2023, which is $1,000 higher than the previous record set in 2021. While the company may have expanded too rapidly in the past, this strategic shift has proven effective in improving profitability.
Overall, it generated $3.41 billion in Q2 2024 revenue, recording a 14.89% year-over-year improvement, primarily impacted by industry-wide declines in vehicle average selling prices. Despite prioritizing unit economics and profitability, retail unit sales increased by 33%. The operational teams successfully increased production capacity to improve customer selection, but inventory levels remain below target due to ongoing high demand.
The company cut over $1.1 billion in annualized Selling, General, and Administrative expenses in 2024 and restructured its debt to save $430 million in annual interest.
In the second quarter, it bought back $250 million of its 2028 senior secured notes and raised $350 million in new equity. These efforts contributed to a strong first-quarter performance, making it a promising investment opportunity.
Kerrisdale Capital made the following comment about Carvana Co. (NYSE:CVNA) in the investor letter:
“We are short shares of Carvana Co. (NYSE:CVNA), a $4bn market cap online platform for buying and selling used cars. Originally hyped up as an innovative disruptor, Carvana is now recognized to be just a poorly run auto retailer struggling under the challenges of a severe industry downturn and the unsustainable burden of $6.5bn in debt. While many have shared concerns over Carvana’s business before, we voice ours at a time when shares have risen 165% in only a month on misguided optimism for profits that amount to little more than buffing the paint job on a totaled car.
Over its history of burning billions of dollars of investor capital to manufacture topline growth, Carvana has never generated sustainable profits or free cash flow. Even during the pandemic, when Carvana was virtually the only online option for scores of desperate car buyers willing to pay any price, the company failed to turn an annual profit. As the prospect of bankruptcy loomed, last year management began slashing costs, shrinking its operations and finessing working capital to try to generate positive free cash flow, and still failed. The company is pursuing a last-ditch attempt to sell markets on a new narrative, but ultimately, the business can’t escape the following reality: 1) whether a small local dealer or a tech-driven online platform, flipping used cars is a tough, capital-intensive business with lousy margins and, 2) any company can grow quickly and take share if run irresponsibly on costs, especially if capital markets are willing to foot the bill. Rather than representing true disruptive change, Carvana is a flawed player, armed with tools no better than the competition it seeks to disrupt and led by a management team which lacks seasoned automotive, operational experience. Carvana didn’t make money even when cars sold themselves, interest rates were low and used car prices were skyrocketing. Today, none of that is true anymore, and the company has no hope but to eventually restructure its massive debt load…” (Click here to read the full text)
