Much like Carvana's (CVNA -3.55%) share price over the past year, which has a 52-week range of $17.30 per share to $309, there is a wide range of opinions regarding the used car retailer's long-term bull thesis and the more current bear argument.
Let's look at some highlights of each, and see which case comes out on top.
Bear thesis
Let's focus first on one major bear talking point: Carvana's ballooning debt.
Image source: Carvana's Q2 SEC filing.
This table is important because it shows two critical things: how much debt the company recently took on compared to its prior levels, and also the jump in interest rates attached to it.
To dig a little deeper, the interest on each of the senior notes is payable semi-annually. For the 2030 notes, it begins on Nov. 1, 2022, meaning that Carvana's total interest expense is going to jump going forward.
Let's take a different angle, one that compares Carvana's total debt to a competitor in two ways.
CVNA Total Long Term Debt (Annual) data by YCharts
While the chart will show CarMax having much more total long-term debt, the spike in the amount of debt Carvana took on compared to its equity is concerning. A higher number simply suggests increased risk as the company finances more of its operations through debt than its own resources. This suggests that while CarMax has more debt, it's a more mature company and less risky.
Ultimately, as Carvana continues to take on debt, and the interest payments on that debt increase, it'll make it more difficult to bring its cash burn back from scary levels. This is another primary bear concern, as you can see in the bottom portion of the graph below.
CVNA Cash and Equivalents (Quarterly) data by YCharts
To be fair, some of that accelerated cash burn can be accredited to the company's acquisition of ADESA's U.S. physical auction business from KAR Global, but the long-term trend isn't inspiring.
The good news for Carvana is that those 2030 notes put some cash in its pocket, as you can see in the top portion of the above graph. However, with a turbulent year ahead for the automotive market as interest rate hikes are absorbed amid lower consumer sentiment and an uptick in gas prices, will it be enough?
Bears don't believe so.
Bull thesis
Sure, high used vehicle prices, rising interest rates, and macroeconomic pressures are creating headwinds. But as the market balances out, these headwinds will eventually turn into tailwinds down the road.
Carvana management has already shifted priorities from rapid organic growth to driving profitability by cutting costs and improving operations -- something the ADESA acquisition is expected to help with significantly long term. Carvana's acquisition will also increase market penetration and consumer offerings, adding 56 locations to drive scale.
And while 2022 has been challenging for Carvana investors, let's take a second to remember some highlights from the end of 2021:
- Carvana was the fastest-growing e-commerce company in U.S. history, and the fastest automotive retailer to sell 1 million vehicles online.
- Carvana's original Atlanta market reached 3.5% market penetration during the fourth quarter, an increase of 51% year over year. And 95% of the company's markets are ramping up faster than Atlanta at the same age.
- 2021 was the eighth consecutive year of $400 or more gross profit per unit (GPU) improvement.
Let's bolster some of those highlights with visuals.
Image source: Carvana's Q4 2021 presentation.
To show just how well Carvana has learned to enter markets, compare the newest three cohorts of market penetration to the older cohorts.
Image source: Carvana's Q4 2021 presentation.
To sum up what bulls know to be true, the company has proven it can increase GPU, and it has proven it can enter new markets even better while its older markets are still gaining incremental share.
Rapid growth is expensive, and it has certainly weighed on company financials to create those 2021 highlights. Carvana is betting on the long term with its ADESA acquisition, cutting costs and rebalancing for near-term headwinds and cost reduction, and has proven it can improve key metrics such as GPU consistently.
Will Carvana survive its current challenges, become a great company, and see its long-term goals come to fruition? Bulls believe so.
Bull vs. bear: Who wins with Carvana?
Both arguments are compelling, and also valid in their own right. However, If the market is indeed a short-term voting machine, as Benjamin Graham once quipped, it's clear the bears are winning with concerns about debt, cash burn, and rapid growth at the risk of financial uncertainty (Carvana shares have plunged 93% over the past year).
While the bears have the clear edge right now, if management proves to investors it can reduce the cash burn and capitalize on its ADESA acquisition quickly, the bulls could be rewarded with a long-term victory.
Stay tuned, 2023 will be a very, very telling year for Carvana.
