If you happened to own a stake in Carvana (CVNA 8.79%) prior to Wednesday morning's release of its second-quarter results, congratulations! Shares jumped another 40% that day, and most of that gain remains intact.
If you're sticking with the stock because the company is clearing $6,520 worth of gross profit for every used car it sells to retail customers, however, you may want to reconsider. The number's more than a little misleading.
The rest of the story
Kudos to Carvana for renegotiating its total long-term debt load of $6.5 billion, lowering it by $1.2 billion. Perhaps more important right now, the company was able to postpone the repayment of most of its debt coming due in 2025 and 2027, giving it some much-needed fiscal flexibility in the meantime.
None of this balance sheet relief, however, changes the fact that there's far more to the story behind Carvana's Q2 gross profit per unit (GPU) of $6,520. Three important facts need to be laid out.
1. The used car dealer isn't selling used cars to consumers at an average markup of $6,520 apiece. It's only scoring a markup of $2,666 from its per-car cost, on average.
Image source: Getty Images.
That's still an incredible figure, to be clear. Indeed, it's the best per-car profit Carvana's reported in a couple of years.
Given the pricing red flags we're seeing from the wholesale used car industry, though -- Cox Automotive reports wholesale used car values fell for a third straight month in July and are now down 10% from year-ago levels -- it's not apt to last. Although these cheaper cars worked to Carvana's advantage during the second quarter of the year, used cars' retail prices reliably follow used car wholesale prices lower. It just takes a few weeks, if not months.
2. And the other $3,854 worth of per-car gross profit? That's where things get a bit complicated.
The stumbling block is how Carvana elects to do its GPU math and reporting. See, the company doesn't just sell used cars to consumers. It also operates a wholesale business. This operation drove $777 million worth of revenue last quarter alone, accounting for roughly one-fourth of Carvana's total top line of nearly $3 billion. Of that wholesale revenue, $65 million of it was turned into gross profit.
Except, the company doesn't tout its gross profit per wholesale vehicle it sold during the quarter in question. It instead adds that number to its overall per-car profitability figure. For the second quarter, that was $849.
Image source: Carvana's Q2-2023 investor materials.
3. As for the remaining "other" $3,005 worth of GPU, that's the per-retail-unit's portion of loans Carvana made to its customers but then turned around and sold to loan servicers. It is technically a gross profit, but there's nowhere near that much net profit being secured on this front. Through the first half of the year the company has sold over $3.1 billion worth of these receivables, but it spent $2.9 billion putting them in place -- spending that's not reflected in any GPU measure.
Image source: Carvana's Q2 2023 investor materials.
The kicker: If we slip into a recession, these loans could become much less marketable in a hurry, undermining the biggest piece of Carvana's per-car gross profit.
Cost-cutting isn't keeping up with its contracting business
It's an eye-opening reality check for investors who don't scour the fine print found in a company's quarterly reporting. In this case, though, the gross-profit-per-unit victory lap obscures more troubling developments like sinking sales and problems with Carvana's cost-cutting plans and intended turnaround.
As to the first matter, while the company may be earning more per car it sells at retail, it's selling a lot fewer cars these days. Last quarter's unit sales of only 76,530 vehicles is down about 35% year over year and marks the lowest unit sales seen in over two years. Revenue was down by 23%. You should know that wholesale sales are slipping as well. All of this weakness extends existing trends.
Image source: Carvana's Q2-2023 investor materials.
Carvana can make a relative fortune on every car it sells, but if it's selling fewer and fewer cars, that's a problem.
On the bottom line, the company is culling costs in search of profitability, or that's the stated plan anyway. Based on this reduced spending (particularly on the selling and administrative fronts), Carvana says it "expects to achieve positive adjusted EBITDA for the second consecutive quarter in third [current] quarter."
Except, the company isn't actually making a ton of net progress in this regard. Although its selling, general, and administrative (SG&A) expenses are being curbed on a per-car basis and overall, they're still relatively high. And all of this progress is more than being offset by rising per-sold-car depreciation and stock-based compensation costs.
Image source: Carvana's Q2-2023 investor materials.
Depreciation, of course, is a non-cash expense that's not reflected in the EBITDA figure that Carvana expects to remain positive in the quarter now underway.
Some healthy skepticism of Carvana is merited
That paints a complicated picture of a company with a lot of moving parts that isn't reflected by its broadly touted GPU figure. Meanwhile, the used car business itself continues to ease back toward normalcy after COVID-19 dramatically disrupted it. It's still not clear where it or this company will end up when all is said and done.
But given the data we can ferret out of its quarterly numbers -- all of its quarterly numbers -- paired with a sense of the used automobile market's foreseeable future, Carvana still looks and feels more like a speculative bet than a long-term investment.
That's not to say this will always be the case. Car vending machines are cool. It's just as cool to have the car you purchased online sight-unseen delivered to your door. Maybe the company will become and remain fiscally viable one day.
This isn't a company that's in any better shape than it was headed into the pandemic, however. Indeed, even with the recent debt renegotiation, it's still sitting on more than $5 billion in debt it will have to pay back eventually and service in the meantime. That number was less than $1 billion in pre-COVID 2019 when Carvana wasn't doing a whole lot less business than it's doing now.
Just be careful here. The hype's getting pretty thick, obscuring the risk. You might want to lock in some profits (if you've got them to reap) and then wade back in when there's more certainty regarding Carvana's profit-growth plan. It may require a sales scale-up that Carvana just can't afford right now.
