Carvana (CVNA 8.79%) stock has risen more than 500% so far in 2023. That's a huge price advance by any measure, but the stock is still down over 90% from its 2021 highs. There's a lot to wrap your head around here before you decide to buy Carvana stock.
Carvana went from swan to ugly duckling
Carvana is trying to turn what has long been an in-person experience into an online one. That was really attractive to customers and investors during the coronavirus pandemic when in-person was a big problem because of social distancing efforts. The stock rocketed higher.
To be fair, the company's business was growing very rapidly at the time. To put some numbers on that, the company sold 50,400 used cars in the fourth quarter of 2019, before the pandemic. By the second quarter of 2021, that figure had more than doubled to 107,800. Sales peaked in the second quarter of 2022 at 117,600. So, from a business growth perspective, Carvana was executing very well, and for a while, investors appeared quite excited by that growth.
But while Carvana was clearly focusing on business growth, it wasn't focused on profits. Growth at any cost can only go on so long, with earnings per share plunging to a loss of $15.74 per share for the full year in 2022. That was much worse than the loss of $1.63 in 2021. Adding to the issue on the earnings statement, the company's leverage was quickly ratcheting higher, as well. Ongoing red ink and a rising debt load are not a good combination.
CVNA Total Long-Term Debt (Quarterly) data by YCharts.
Carvana has muddled through, but what's next?
Clearly, Carvana hasn't lived up to early expectations, and investors have reacted accordingly. However, the retailer was able to work with its lenders on an agreement that should make the debt load less of an issue, at least for now. That has investors a bit more upbeat, which helps explain the year-to-date stock advance.
The company has also shifted away from its growth-at-any-cost approach and is cutting costs. Both have helped to improve the company's financial performance. In the second quarter of 2023, for example, the loss was "just" $0.55 per share, a lot better than the loss of $2.35 in the second quarter of 2021.
Investors still need to take a cautious approach here. For starters, Carvana is still deep in the loss column. It can't continue to lose money forever, and waiting until it figures out how to operate profitably will probably be the right call for most investors. There's another problem here, though. The company's three-step plan to improve results doesn't actually include anything about earnings.
Here are the three steps:
- Drive the business to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Drive the business to significant positive unit economics.
- After completing steps one and two, return to growth.
Step two suggests operating a profitable business, but unit economics isn't what it may seem. Basically, that figure is just revenue per unit minus cost of goods sold per unit. That's effectively gross margin. The company still has to pay salaries and interest costs, among other things, after that point.
In other words, the company seems to be planning to push the accelerator on growth again before it is consistently profitable. Given the history here, that should probably worry investors.
Watching from the sidelines
At the end of the day, most investors will probably be better off waiting until Carvana can turn a consistent profit. Given the weak track record, including the massive overreach on the growth and leverage fronts, the risk of another misstep doesn't seem worth the potential offered by a return to unprofitable business growth. Simply put, Carvana still has a lot to prove.
