Meme stock investors are at it again, buying shares of bankrupt Revlon (REV) in an attempt to hit it big with a lottery ticket. The struggling makeup retailer filed for bankruptcy on June 16th with shares trading at just $1.95. However, shares have now surged based on interest from retail investors, and are now changing hands at over $8 a share. Is Revlon now worth four times what it was when it filed for bankruptcy just a few days ago? Of course not. While there is speculation that Revlon could be acquired by a bigger company, there is no offer yet -- and even if one materialized, it could be at a far lower price than where shares are now trading. As you can probably surmise, investors buying in based on the hype will most likely eventually be left holding the bag.
For risk-tolerant investors who are looking for a high-risk, high-reward play, why not instead invest in a much better stock like Carvana (CVNA 5.85%)?
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What's so great about Carvana?
Risk-tolerant investors would be much better off buying shares of Carvana, an innovative, growing company that is taking share in a massive market. Carvana was one of the hottest growth stocks in the market last year, but shares are down 93% from their 52-week high as investors are concerned that the company's cash burn and heavy debt load could eventually be unsustainable and put it into a situation like the one Revlon is facing now. But while the game is already essentially over for Revlon, Carvana still has time to figure things out and right the ship. Furthermore, the pot of gold at the end of the rainbow if things go right is a lot more lucrative for Carvana than it would be for Revlon. Carvana is building a platform that is disrupting the used vehicle market in the United States, a market that the company says is an $840 billion opportunity annually as of 2019.
Many people find buying a car one of the least enjoyable experiences they have to trudge through every several years, so the used car business is a market that is basically begging for a disruptor to come in and shake things up. Carvana improves upon the legacy experience because you don't need to go to a used car lot and haggle over prices. The prices are listed on the website, and you can pick the car that you want and have it delivered right to your driveway. Skeptics might question how someone could buy a used car without seeing it in person and taking it out for a test drive, but to solve this problem Carvana gives customers a 7-day grace period to try out the car -- if they don't like it, they can return it. The website also gives a detailed 360-degree view of each vehicle and highlights any faults the customer should be aware of, even minor ones like small scrapes or scratches. Carvana has a great breadth of selection when compared to the average local dealership, as it has 71,000 cars available for sale on its platform. It can take as little as ten minutes to purchase a vehicle on the platform, and next-day delivery is available in certain markets.
The numbers bear out the fact that the company's offering seems to be gaining traction with customers. Carvana has grown revenue from just under $2 billion in 2018 to over $12.8 billion in 2021. Over the same time horizon, the company sold 94,000 vehicles in 2018, and increased this total to 425,000 in 2021. With this growth, Carvana has quickly grown into the second-largest seller of used cars in the United States, and is poised to keep gaining share in this fragmented market.
The turnaround
The company's losses grew by sixfold last quarter, and the company added to its substantial debt load to acquire the U.S. auction business of ADESA, which rattled many investors. But the company has a turnaround plan in place, and is prioritizing becoming cash-flow positive so that it can sustain itself without raising further debt or equity. The company plans to reduce selling, general, and administrative (SG&A) expenses, and will focus on improving the unit economics on the vehicles it buys and sells. There is reason to believe that it can make progress on these fronts, as the company has significantly improved its gross profit per unit every year since 2015, rising all the way from just $206 per vehicle in 2015 to just over $4,500 in 2021. Carvana also projects that it will reduce capital expenditure markedly over the next several quarters, which should help to ease its cash burn. The company has achieved a great deal of success so far in less than a decade of existence, so I am optimistic that it can continue to improve and get to where it needs to be.
Forget about Revlon
Before clicking the buy button on a stock like Revlon, take a long hard look at a stock like Carvana instead -- it is indeed a high-risk, high-reward situation, but one with less risk than already-bankrupt Revlon, and one with far greater reward if the company can right-size expenses and continue to take a bigger piece of the pie in the massive used car market. If Carvana is successful in its new operating plan, it could be worth many times what it is today, without even approaching previous highs.
