Carvana crashes back down to earth

Carvana’s big rally is now looking more like a blip on the radar.

Shares in the online-car retailer soared Thursday, closing up by 56% from the prior day on news that it expected to post $50 million worth of adjusted EBITDA in the current quarter, powered by stronger per-car sales profitability.

For Carvana, the gains were a welcome turnaround. The company, which once had stock prices as high as $360 in 2021, had experienced a steady decline down to the single digits. However, despite topping $25 per share on Thursday in the wake of its profit update, shares of Carvana closed at $19.07 today, erasing much of its recent gains.

What changed

Carvana’s debt and declining revenue, and the cool response it got from industry analysts, eclipsed the company’s sunny profit predictions. There was also concern that the company’s adjusted profitability result was a one-time affair.

Other commentary echoed what TechCrunch wrote yesterday: Carvana’s boosted profitability was coming on the back of falling revenues. At current count, Wall Street analysts expect Carvana to report revenues of $2.57 billion in the second quarter and $2.63 billion in Q3. Those figures compare poorly when placed next to 2022’s Q2 and Q3 revenue results of $3.88 billion and $3.39 billion, respectively.

Carvana is a deeply indebted company, with long-term debt of more than $6.5 billion at the end of the first quarter. With gross profit of a few hundred million per quarter at current count, and negative operating cash flow of $66 million in Q1 2023, the company has an uphill road ahead of it.

Some history

Carvana launched in 2013, calling itself the “first complete online auto retailer.” At the time, co-founder Ernie Garcia III said the company had cut out the physical overhead associated with traditional dealerships, replacing it with “consumer-friendly technology” and offering 360-degree interior and exterior views of its inventory.

Carvana embraced physical retail spaces in 2015, albeit in a novel way, via multi-story “car vending machines.” In the years since, Carvana secured billions in equity and debt financing, and it bought a couple of startups — namely, Car360 and Adesa. Through it all, the company has yet to record a real profit.

Certainly, better per-sale profitability and improved adjusted profits for the second quarter are welcome — as evidenced by investors’ initial reaction yesterday. However, it’s not clear if Carvana’s long-term trajectory has changed enough to warrant a whole-cloth repricing. Cooler, or more cynical, heads seem to have prevailed today.

Still, Carvana, at around $19 per share, is worth close to a third more than it was before it dropped its latest news. That’s a win for the company no matter how you slice it.