There's seemingly more to celebrate about Carvana (CVNA 4.04%) than most investors were expecting, given the stock's 24% jump last Friday following release of its latest results and outlook.
The used car dealer chain just completed its best first quarter ever, generating more gross profit per sold vehicle than it's ever produced. Carvana turned $2.6 billion worth of first-quarter revenue into a gross profit of $341 million. While it still ultimately booked a per-share loss of $1.51, that's still better than the $2 per-share loss analysts were collectively expecting, and a marked improvement on the year-earlier loss of $2.89.
Moreover, the company anticipates a positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the quarter currently under way. All these signs suggest the organization is en route to greatness. But before jumping on the bandwagon, there's a handful important details you'll want to consider.
NYSE: CVNA
Key Data Points
1. Sky-high used car prices are set to fall
If you've priced used cars of late, you may still be suffering from a bit of sticker shock. Numbers from CarGurus.com indicate used car prices were persistently high through 2022 and into 2023. Carvana banked a gross profit of $4,303 for every automobile it sold during the three-month stretch ended in March. That's 52% higher than the same figure from a year earlier.
However, prices are finally starting to edge lower. While they ticked slightly higher again in March versus February's figures, they're still below 2022's high levels that boosted Carvana's profits so firmly during the first quarter. And they fell again in April, rekindling new price weakness evident earlier in the year.
Cox Automotive's senior manager of economic and industry insights Chris Frey notes of the data, "We've experienced eight straight months of year-over-year declines, averaging 8.3%, and it's likely not over yet."
Falling used car prices will put pressure on the amount of gross profit Carvana was able to achieve on each vehicle it sold during Q1. That translates into less overall gross profit, of course.
In this same vein, know that while Carvana may be making more gross profit per car now than it ever has, it sold 24% fewer cars during the first quarter than it did during the first quarter of last year. Indeed, the 79.2 million vehicles it sold in Q1 is the least it's sold in any quarter since the first quarter of 2021.
2. New cars are more available now -- and at lower prices
If you've been shopping for used cars, then it's likely you've done so because new vehicles are scarce or wildly expensive, or both, in the wake of the COVID-19 pandemic.
But that dynamic is finally reversing. Cox Automotive reports that as of the end of March, U.S. auto dealers were sitting on 1.89 million cars for sale -- the most they've collectively offered since May 2021, when inventory levels were on their way down. To this end, Cox believes 15.1 million new automobiles will be sold within the U.S. this year, up from 14.3 million in 2022.
At the same time, new car prices are at least starting to peel back from 2022's extreme levels. Kelley Blue Book's estimated average transaction price of $48,008 in March marks the third straight month that prices in the U.S, have fallen from December 2022's peak of $49,507.
In fact, prices are as low as they've been in months, and JPMorgan Chase says they should continue to slide for the duration of the year. A wider selection of cheaper new cars of course works against demand for the used cars Carvana sells.
3. Cost-cutting isn't always beneficial in the long run
All well-run businesses continually review their costs, cutting them when they reasonably can. Carvana is no exception. It's noteworthy, however, that much of Carvana's expected EBITDA growth will be the likely outcome of deep cost-cutting rather than an expansion of the business.
In its first-quarter release, the company touted how it had "completed [its] SG&A reduction target outlined in fourth quarter one quarter early, resulting in annualized SG&A reduction of $1 billion on a GAAP and Non-GAAP basis compared to a year ago."
For perspective, Carvana spent a total of $2 billion on its selling, general, and administrative costs in 2021, and a total of $2.7 billion on them last year as it grew its total scale; had it not been for cost-cutting, the company presumably would have spent much more.
The funny thing about cutting costs is, it's often difficult to see how important an investment is until you're no longer spending that money. With $1 billion less now being spent on marketing, management, incentives, and administration, Carvana may quickly find itself struggling to do business like it has been up to this point.
Carvana stock is still too risky for most investors
None of this is to suggest Carvana won't be able report a positive adjusted EBITDA for this year's second quarter, as it said it would. Perhaps it will.
Just be aware that much of the optimistic outlook may be rooted in Q1 conditions that aren't poised to persist. Fair or not, stocks are priced based on where a company's going rather than where it's been. For most investors, there's just not enough assurance that Carvana's foreseeable future will be as bullish as it may look.
