Carvana (CVNA 0.11%) stock's rapid rise during the COVID-19 pandemic has screeched to a halt and quickly reversed itself in the past year. Shares soared nearly 300% between Jan. 2020 through Aug. 2021, but investors soured on many "pandemic winners" during the recent bear market.
Adding to the uncertainty was Carvana's pricey acquisition of a used car auction business earlier this year, at a time when declining gross margins and rising debt levels were already weighing on its results.
Data by YCharts.
So does the stock's recent plunge offer an attractive entry point for investors? Let's dig in.
Repairing gross profit per unit
Due to changes in the economy and automotive market that are largely out of its control, Carvana's management has opted to focus on what it can control: reining in expenses and improving operations. Specifically, management wants to offset "higher reconditioning and inbound transport costs" in its retail segment, which negatively impacted gross profit per unit (GPU) by roughly $600 during the second quarter relative to the prior-year period.
With Carvana's cost savings initiatives now in full swing, management expects sequential improvements in selling, general, and administrative expenses per retail unit through the third and fourth quarters. On the bright side, Carvana already posted a sequential improvement in total GPU during the second quarter, growing from $2,833 in the first quarter to $3,368. Management plans to build on that progress, and investors can expect Carvana's total GPU to once again top $4,000 and EBITDA to be strongly positive next year.
Despite Carvana's stock price closely mirroring the GPU decline, the latter appears to be a speed bump rather than a long-term trend.
Image source: Carvana.
Will acquisitions drive growth?
Carvana closed its acquisition of ADESA's U.S. physical auction business, a wholly-owned subsidiary of KAR Global, for a whopping $2.2 billion. The company funded the deal by taking on $3.275 billion in new debt.
While the price tag was controversial among investors, the acquisition will help Carvana add significant infrastructure, team members, and vehicle selection, plus faster delivery times. The addition will also boost its reconditioning operations and expand its production capacity by roughly two million units annually to over three million units total. Once the acquisition is fully integrated, roughly 78% of the U.S. population will be within 100 miles of a Carvana inspection and reconditioning center.
Time to buy Carvana?
It isn't a stretch to think that Carvana's stock was overhyped during the pandemic as it offered a perfect solution for online, contactless vehicle purchases. At the same time, it isn't a stretch to think the stock is oversold as its GPU hit a speed bump and debt increased to fund its ADESA acquisition.
If management can take advantage of its new assets and offer an even faster, bigger marketplace for used cars while improving its total GPU, this could prove to be a great entry point in an intriguing automotive stock.
