Carvana (CVNA 8.79%) went from market darling during the dark days of the COVID-19 pandemic to a villain in the blink of an eye. The problem for Carvana was that its rapid growth was incredibly expensive and its operations were far from efficient.
Management pulled back drastically on growth efforts to refocus the company on becoming more efficient, and the results have looked impressive, sending the stock over 1,000% higher over the past year.
With such a run up, is it too late to buy into Carvana's rebound? Not so fast -- here are three charts that show the progress Carvana has made, as well as the remaining upside.
Driving profitability
Once Carvana pumped the brakes on growth, management immediately went to work driving efficiencies from the top down. It started by controlling the level of staffing, advertising, and inventory, while also improving processes and technologies to boost per-vehicle economics.
Management reduced the cost of retail reconditioning of vehicles and transportation costs by roughly $900 per unit over the past year. Further, after shifting its focus to profitability, management has reduced retail and wholesale vehicle operations expenses per unit by a staggering $1,400 since its peak in the first quarter of 2022. Here's a look at a similar metric and the decline in costs from Carvana.
Image source: Author. Information source: Carvana Q3 2023 letter to shareholders.
With such a drastic cut in costs, Carvana of course saw a similar surge in gross profit per unit (GPU), hitting a record high GAAP GPU of nearly $6,000.
Image source: Author. Information source: Carvana Q3 2023 letter to shareholders.
Where's the upside?
After a stock price run from roughly $4 to $44, investors are probably left wondering if there's any upside remaining. If you asked Carvana management, the answer would be a resounding "yes".
When Carvana pumped the brakes on growth, it left a huge void in production and logistical capacity, which isn't great news for the company's overhead expenses. The good news is that that was offset by other cost cuts, but with the company running far more efficiently and profitably it has plenty of capacity to grow into.
In fact, based on its current infrastructure utilization, management believes it can triple the number of retail units sold with existing overhead. Here's a look at Carvana's current capacity utilization.
Image source: Carvana Q3 2023 letter to shareholders.
But what does that mean in dollar terms, you ask? Carvana believes there to be a $1,000 overhead expense per unit opportunity over time, which could easily send its GPU to a new record high.
Is Carvana a buy now?
Carvana has had a roller coaster ride over the past four years, but the darkest days appear to be behind the company. Now, with a leaner operation, the company is poised to step on the accelerator once again and grow into its retail unit capacity and further improve profitability and scale.
One metric for savvy investors to watch when Carvana reports earnings is total interest expense. The company took on substantial debt for a large acquisition around the time of the COVID-19 pandemic, and it's paying a pretty penny for it now. If the company improves that metric over time, as it has other metrics, it will be in an even better position to keep its stock price moving higher.
Investors can argue Carvana grew too much too fast, but in a Wall Street world that rewards quick growth Carvana took a roundabout way to get to a more efficient operation for investors. Carvana still has plenty of upside, and investors still have time to buy into this automotive turnaround story.
