Streaming-industry leader Netflix (NFLX 1.74%) is dominating headlines this week after announcing that it lost subscribers in the first quarter. That ended a decade-long trend of growth, and sent the stock lower by 35% on the following trading day.
But there's another large company that just reported a similar contraction in first-quarter sales: Carvana (CVNA 1.57%), a leading used-car seller leveraging digital technology to transform the customer experience.
It had a powerful boost in growth during the pandemic thanks to a shortage of new cars, but a sales drop in the first quarter ended a growth streak that stretched back to 2014. Here's what it could mean for Carvana stock.
Image source: Getty Images.
A dip in sales and gross profit
The pandemic-driven shortage of new cars not only boosted sales for used cars, but also caused used car prices to soar. It was a counterintuitive phenomenon that was bound to reverse, as no rational individuals really expect the value of their vehicle to rise.
The Manheim Used Vehicle Value Index peaked at 236.3 in January 2022, subsequently falling to 221.4 in April. It's the lowest reading since September 2021, and marks the third consecutive month of contractions.
For sellers of used cars, like Carvana, this coincided with two things: a drop in sales and a drop in gross profit per car sold.
Still, Carvana's quarterly sales tower over the numbers it was doing just a few years ago. The company's growth has been staggering. A falling gross profit per car is a concern, though, because Carvana sits on an inventory of used vehicles, and a widespread drop in price could squeeze profit margins further and create significant financial harm for the company.
The future is uncertain
Carvana is still registering net losses despite its strong sales performance during the pandemic. It has a long-term goal to generate a margin based on EBITDA (earnings before interest, tax, depreciation, and amortization) of between 8% and 13.5%. It has consistently improved this margin each year, but in the recent first quarter, the number collapsed deep into negative territory again.
The move was mostly attributable to a shrinking gross profit per car sold, as highlighted by the previous chart.
If both sales and gross profit continue to dip, Carvana will be faced with a double whammy of headwinds hampering its ability to achieve its EBITDA goals. The end result will be further net losses, which is tough to swallow for investors, considering that the stock is already down 75% from its all-time high.
With that said, the company's digital approach to used car sales is clearly attracting customers. Rather than wandering around car yards, prospective buyers can make a purchase online and have their car delivered directly to their home by Carvana. It means the company doesn't need to own costly sales locations in every state, using the internet to build scale and reach 81% of the U.S. population.
It's most likely the future of car buying, but eventually Carvana will need to convert its success into profits for investors. Otherwise, its stock might struggle to recover.
