Digital used-car buying platform Carvana (NYSE:CVNA) found itself a little further away from Nirvana on Thursday following its release of fourth-quarter 2019 earnings after the market close on Wednesday. While the company still exhibited enormous top-line growth, more than one disappointing aspect of the report triggered a sell-off in its stock. Shares were down 11.5% in early-afternoon trade on Thursday. Below, let's briefly review the quarter to find the root of investor dissatisfaction, bearing in mind that all comparative numbers are presented against those of the prior-year quarter.
Carvana: A bird's-eye view of the numbers
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$1.10 billion||$584.8 million||88.1%|
|Net income (loss)||($125.7 million)||($86.4 million)||(45.5%)|
|Diluted earnings (loss) per share||($0.82)||($0.58)||(41.4%)|
Highlights from the quarter
- Retail units sold continued to exhibit impressive growth, leaping by 82% to 50,370.
- Gross profit per unit, or GPU, "ex-gift" (i.e., excluding the effects of a Q3 2018 milestone compensation bonus awarded to employees) increased by $723 to $2,854. While this represents a substantial increase, it's a bit below the $3,000 threshold Carvana hit in the previous two quarters. GPU of $3,000 is a multiyear profitability target for the organization.
- Ex-gift EBITDA margin (i.e., earnings before interest, taxes, depreciation, and amortization, divided by revenue) improved by 310 basis points to negative 7.7%.
- The company opened one new car-vending machine, bringing its year-end total to 23.
- Carvana closed its fourth auto loan securitization (i.e., the bundling and sale of its auto loans). The organization completed $2 billion worth of these securitizations in 2019.
- Management disclosed that since quarter-end, Carvana has entered 15 new markets, which pushes its total U.S. population coverage to 68.7% against 66.9% at year-end.
- Also since the quarter ended, the company opened its eighth inspection and reconditioning center (IRC) outside of Charlotte, North Carolina, while completing sales-leaseback transactions for this facility and three upcoming IRCs. Finally, Carvana closed on two new revolving credit facilities totaling $1 billion after the end of the fourth quarter. The revolving credit lines will be used to finance auto loans in advance of securitization.
The 2020 outlook
Alongside earnings, Carvana issued its outlook for the current year. Management expects that the online platform will achieve retail unit sales of 255,000 to 265,000, which will mark growth of 44% to 49% over 2019. Similarly, revenue is expected to increase at a rate of between 42% and 47%, translating into a projected 2020 top line of $5.6 billion to $5.8 billion.
GPU is chalked in at $3,200 to $3,400, which would be considerable progress from 2019's full-year GPU ex-gift of $2,883. Carvana anticipates whittling its EBITDA margin to between negative 3.5% and negative $1.5% from the negative 5.8% (ex-gift) it generated last year. In terms of market expansion, Carvana aims to cover 73% to 75% of the U.S. population with its entry into new markets in 2020. The company reached roughly 67% of the U.S. population at the end of 2019.
Why shares are tanking
After its meteoric rise of 189% last year, Carvana stock has little room for error; the company's current-year outlook likely provided the biggest catalyst for today's sell-off. While shareholders in the auto industry investment don't expect Carvana to repeat 2019's 101% year-over-year revenue growth (which ended a six-year streak of triple-digit sales expansion), the 50 to 60 percentage points of projected sales deceleration appears to have caught many an investor off guard.
It's also problematic that despite a much-lower revenue growth rate, EBITDA margin will only show a slight improvement, and remain negative this year. Often, a curbed expansion rate gives companies a chance to realize more marketing effectiveness per dollar spent (versus bumping up sales and marketing expenditures to achieve faster growth). That doesn't seem to be the case here. Moreover, even the projected rise in GPU won't be enough to push EBITDA into positive territory, much less GAAP-based profitability.
A third factor, of much less consequence, is the current market environment. As of this writing, the S&P 500 index has lost nearly 8% in just four trading sessions due to mounting fears over the spread of COVID-19. Present market sentiment is dampening reactions to all but the strongest of earnings releases.
As I discussed last month, Carvana may be headed back to earth. But it appears to be maintaining investment in IRCs and gunning for new markets, the two factors I identified in my analysis that should bode well for the stock over the longer term.