For a while there, one of the best-performing stocks in the market was Carvana (CVNA -0.42%), whose shares were up an astronomical 3,230% from their initial public offering in April 2017 to their all-time high in Aug. 2021. Investors who were smart and lucky enough to get on board early on might have achieved some remarkable returns.
But since that peak, it's been a wildly different story, as the stock is down 97% (as of April 13). Now, shareholders are wondering if it's even worth owning the stock anymore, with the company dealing with a very uncertain outlook.
Let's assume that Carvana is able to successfully navigate the current macro environment and that its unfavorable financial situation is overcome. Then where will the stock be in three years? The answer might give current shareholders some much-needed optimism.
Market share gains
There are usually 40 million used cars sold in the U.S. in any given year, with a total market value that exceeds $1 trillion. In 2022, Carvana sold 412,296 retail units, which equals about 1% of the overall industry. In 2014, the earliest available data, the business sold just 2,105 retail units. It doesn't require a math degree to figure out that this was a monster market share gain that happened in eight years. And even after those gains, Carvana is still just a tiny fraction of the market.
Because the company really does provide customers with a superior experience compared to the traditional brick-and-mortar dealership model, it's not a stretch to believe that Carvana should continue selling more cars and generating more revenue in the years ahead. According to Automotive News, a magazine covering the auto industry, the top 100 nationwide used-car retailers combined only accounted for an 11.1% share of the industry's annual unit volume in 2021. This is a very fragmented market, making it ripe for Carvana to keep growing.
Getting to profitability
Carvana's business model is easy to explain but incredibly difficult to execute. In other words, this is a very capital-intensive enterprise. And it makes sense why. In order to develop the technological and physical infrastructure to have a nationwide vehicle inventory that anyone in the country can buy from, a lot of money needs to be invested. Since going public, Carvana has constantly sold investors on the fact that it needs to achieve a certain level of scale quickly, posting net losses in the meantime, in order to one day leverage its giant fixed costs and become profitable.
Between 2014 and 2021, Carvana's net margin went from (36.6%) to (2.2%), in what looks like a perfectly straight line up and to the right. This trajectory was derailed last year. But whenever macro conditions improve, there is the possibility that this business will be back on the right track to being in the black.
Management's key objective that should guide Carvana in the right direction is to optimize the cost structure to better match demand. This means finding $1 billion in annualized cost savings by the end of the second quarter this year. The leadership team also believes that gross profit per unit will start to rise and get back above $4,000. Managing the business with more conservative estimates for demand is the focus.
Higher stock price
As I noted earlier, Carvana's shares are down a whopping 97% from their all-time high, even though they are up 100% so far in 2023. It's clear that the pessimism surrounding the business has been at elevated levels. This isn't a surprise, given the amount of negative attention Carvana has received over the past year.
On top of every shareholder's mind has been the company's deteriorating financial situation. Macroeconomic headwinds, like high inflation and rapidly rising interest rates, have made used cars less affordable for consumers, pressuring demand for Carvana. Adding fuel to the fire is the company's balance sheet, which had almost $7 billion of long-term debt, compared to just $434 million of cash and cash equivalents, as of Dec. 31. Carvana's $2.2 billion ADESA acquisition last spring looks ill-timed in hindsight, further indebting the business.
This has pushed shares lower. And the current price-to-sales multiple of 0.07 is near the cheapest the stock has ever been. Therefore, if Carvana can overcome its near-term challenges, continue to gain market share, and get closer to positive profits, its stock could be much higher than it is today in three years' time.
