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CVNA's Epic Comeback Makes it the Top-Performing Auto Stock of 2023
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Carvana (CVNA - Free Report) , a company that teetered on the brink of collapse last year, rose like a phoenix in 2023. From whispers of a potential business bust, the used car e-retailer’s revival has turned heads, making it the comeback kid of the automotive world.
In this write-up, we explore Carvana's astounding recovery, highlighting how it not only navigated out of troubled waters but emerged as the top-performing auto stock of the year. In fact, Carvana is the biggest gainer on the Russell 3000 this year.
We will delve into the depths of Carvana's crisis, the strategic pivot that spurred its recovery, and the financial and operational milestones that underscore its resurgence.
From Drastic Crash to Dazzling Heights
This pandemic-darling stock faced a severe crisis in 2022, which cast serious doubts over the company’s survival. Plagued by the combination of a hawkish Federal Reserve, rising vehicle prices, high leverage, goodwill write-offs, declining sales and squeezed margins, the company's stock plummeted, losing 98% of its value in 2022.
Defying the odds, Carvana experienced a stunning reversal in 2023. Its shares skyrocketed by 1,058%, bouncing back from last December's lows of just under $4, to approximately $55 presently. This surge was fueled by effective cost-cutting measures and a strategic $1.2 billion debt restructuring. The first three quarters of 2023 showcased a promising trajectory, rejuvenating investor confidence and driving up the stock price.
A Shift in Strategy
In the face of rising losses, Carvana shifted its focus from growth to operational efficiency. CEO Ernie Garcia's pivot to prioritizing efficiency and cash flow marked a significant strategic shift. Quoting Garcia, "We have shifted our priorities for the first time in company history to favor efficiency and cash flow in recognition of the changes to the market and the economic landscape, as well as to enable us to quickly adjust to changes in our industry that had caused our expenses to be out of balance with sales volumes."
Financial Highlights
Carvana incurred lower-than-expected losses per share in both the first and second quarters of 2023. In the last reported quarter, it posted earnings per share of 23 cents, in contrast to a loss of $2.67 incurred in the year-ago quarter and the Zacks Consensus Estimate of a loss of 85 cents per share.
In the second quarter of 2023, the company managed to achieve its goal of generating positive adjusted EBITDA and also posted a record non-GAAP gross profit per unit of $7,030. In the third quarter, the company continued to generate positive adjusted EBITDA and recorded an adjusted GPU of $6,396.
The combined net income for the second and third quarters of 2023 was $636 million, with more than $300 million in adjusted EBITDA.
Carvana’s cost-cut efforts are paying off. It has completed $1.2 billion of annualized SG&A expense reductions since the second quarter of 2022. Significant improvements were seen in reducing non-vehicle retail costs and operations expenses, leading to a nearly $1,000 gain in unit economics over the last two reported quarters.
Carvana’s financial situation has witnessed improvement, thanks to a debt restructuring deal. On Sep 1, 2023, Carvana successfully concluded its previously disclosed corporate debt exchange offer, garnering approval from 96.4% of noteholders. This resulted in the exchange of $5.52 billion in unsecured notes for a combination of cash and new secured notes. As a consequence, Carvana significantly reduced its total debt by more than $1.325 billion. The strategic move also extended the maturities of its obligations and led to a noteworthy decrease in required cash interest payments, saving the company more than $455 million annually for the next two years.
Achieving Profitability Through a Three-Step Plan
Carvana's third-quarter results were particularly noteworthy, marking the company's highest profitability. This success is attributed to a three-step plan focusing on driving the business to positive adjusted EBITDA, achieving significant adjusted EBITDA per unit, and, subsequently, returning to growth. This three-step plan has been central to CVNA’s comeback.
Carvana achieved the first target of positive adjusted EBITDA in the second quarter of 2023. This stage involved right-sizing staffing, advertising and inventory. The company’s current focus is on driving significant adjusted EBITDA per unit. For that, CVNA is focusing on enhancing operational efficiency across the business, with several technology, process and product initiatives underway. The final step will concentrate on sustainable, profitable growth, leveraging Carvana’s foothold in the U.S. used vehicle retail market.
The company has managed to reduce retail reconditioning and inbound transport cost reductions as a result of fundamental improvements, including in-sourcing third-party services, staffing normalization, process standardization, proprietary software development, logistics network utilization and reduced inbound transport distance. In addition to lower reconditioning and transportation costs, expanded customer sourcing and additional revenue streams from value-added services are also driving retail GPU gains.
It does seem that management is pivoting in the right direction and the company is delivering on its promises. The company expects to generate positive adjusted EBITDA for the third straight quarter in the October-December period. CVNA expects non-GAAP total GPU to exceed $5,000 in the fourth quarter of 2023.
Final Thoughts
Carvana's epic comeback story is a testament to strategic resilience and adaptability in the face of adversity. The company's focus on operational efficiency, cost management, and a clear, step-wise plan for returning to profitability and growth has warded off concerns of bankruptcy. The debt restructuring deal has helped it to stave off a cash crisis.
However, it's important to acknowledge that despite the substantial recovery in 2023, Carvana's current share price remains significantly below its 2021 peak of $377. While the stock is trading at a considerable discount, we advise you neither to sell the stock amid the impressive rally nor to buy it, given the lingering uncertainties.
The challenges ahead are evident, with Carvana grappling with falling revenues, a decline in units sold, and a cautious outlook for fourth-quarter 2023 retail unit sales. Further, the shift toward prioritizing unit economics over growth raises concerns about cost management during potential expansion. In light of these factors, caution is warranted as Carvana navigates this complex landscape.
The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 11% and 45.4%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by $2.55 and 13 cents, respectively, in the past 60 days.
The Zacks Consensus Estimate for STLA’s 2023 sales and EPS implies year-over-year growth of 12.3% and 11.5%, respectively. The earnings estimate for 2023 and 2024 has been revised upward by 6 cents and 33 cents, respectively, in the past 30 days.
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CVNA's Epic Comeback Makes it the Top-Performing Auto Stock of 2023
Carvana (CVNA - Free Report) , a company that teetered on the brink of collapse last year, rose like a phoenix in 2023. From whispers of a potential business bust, the used car e-retailer’s revival has turned heads, making it the comeback kid of the automotive world.
In this write-up, we explore Carvana's astounding recovery, highlighting how it not only navigated out of troubled waters but emerged as the top-performing auto stock of the year. In fact, Carvana is the biggest gainer on the Russell 3000 this year.
We will delve into the depths of Carvana's crisis, the strategic pivot that spurred its recovery, and the financial and operational milestones that underscore its resurgence.
From Drastic Crash to Dazzling Heights
This pandemic-darling stock faced a severe crisis in 2022, which cast serious doubts over the company’s survival. Plagued by the combination of a hawkish Federal Reserve, rising vehicle prices, high leverage, goodwill write-offs, declining sales and squeezed margins, the company's stock plummeted, losing 98% of its value in 2022.
Defying the odds, Carvana experienced a stunning reversal in 2023. Its shares skyrocketed by 1,058%, bouncing back from last December's lows of just under $4, to approximately $55 presently. This surge was fueled by effective cost-cutting measures and a strategic $1.2 billion debt restructuring. The first three quarters of 2023 showcased a promising trajectory, rejuvenating investor confidence and driving up the stock price.
A Shift in Strategy
In the face of rising losses, Carvana shifted its focus from growth to operational efficiency. CEO Ernie Garcia's pivot to prioritizing efficiency and cash flow marked a significant strategic shift. Quoting Garcia, "We have shifted our priorities for the first time in company history to favor efficiency and cash flow in recognition of the changes to the market and the economic landscape, as well as to enable us to quickly adjust to changes in our industry that had caused our expenses to be out of balance with sales volumes."
Financial Highlights
Carvana incurred lower-than-expected losses per share in both the first and second quarters of 2023. In the last reported quarter, it posted earnings per share of 23 cents, in contrast to a loss of $2.67 incurred in the year-ago quarter and the Zacks Consensus Estimate of a loss of 85 cents per share.
In the second quarter of 2023, the company managed to achieve its goal of generating positive adjusted EBITDA and also posted a record non-GAAP gross profit per unit of $7,030. In the third quarter, the company continued to generate positive adjusted EBITDA and recorded an adjusted GPU of $6,396.
The combined net income for the second and third quarters of 2023 was $636 million, with more than $300 million in adjusted EBITDA.
Carvana’s cost-cut efforts are paying off. It has completed $1.2 billion of annualized SG&A expense reductions since the second quarter of 2022. Significant improvements were seen in reducing non-vehicle retail costs and operations expenses, leading to a nearly $1,000 gain in unit economics over the last two reported quarters.
Carvana’s financial situation has witnessed improvement, thanks to a debt restructuring deal. On Sep 1, 2023, Carvana successfully concluded its previously disclosed corporate debt exchange offer, garnering approval from 96.4% of noteholders. This resulted in the exchange of $5.52 billion in unsecured notes for a combination of cash and new secured notes. As a consequence, Carvana significantly reduced its total debt by more than $1.325 billion. The strategic move also extended the maturities of its obligations and led to a noteworthy decrease in required cash interest payments, saving the company more than $455 million annually for the next two years.
Achieving Profitability Through a Three-Step Plan
Carvana's third-quarter results were particularly noteworthy, marking the company's highest profitability. This success is attributed to a three-step plan focusing on driving the business to positive adjusted EBITDA, achieving significant adjusted EBITDA per unit, and, subsequently, returning to growth. This three-step plan has been central to CVNA’s comeback.
Carvana achieved the first target of positive adjusted EBITDA in the second quarter of 2023. This stage involved right-sizing staffing, advertising and inventory. The company’s current focus is on driving significant adjusted EBITDA per unit. For that, CVNA is focusing on enhancing operational efficiency across the business, with several technology, process and product initiatives underway. The final step will concentrate on sustainable, profitable growth, leveraging Carvana’s foothold in the U.S. used vehicle retail market.
The company has managed to reduce retail reconditioning and inbound transport cost reductions as a result of fundamental improvements, including in-sourcing third-party services, staffing normalization, process standardization, proprietary software development, logistics network utilization and reduced inbound transport distance. In addition to lower reconditioning and transportation costs, expanded customer sourcing and additional revenue streams from value-added services are also driving retail GPU gains.
It does seem that management is pivoting in the right direction and the company is delivering on its promises. The company expects to generate positive adjusted EBITDA for the third straight quarter in the October-December period. CVNA expects non-GAAP total GPU to exceed $5,000 in the fourth quarter of 2023.
Final Thoughts
Carvana's epic comeback story is a testament to strategic resilience and adaptability in the face of adversity. The company's focus on operational efficiency, cost management, and a clear, step-wise plan for returning to profitability and growth has warded off concerns of bankruptcy. The debt restructuring deal has helped it to stave off a cash crisis.
However, it's important to acknowledge that despite the substantial recovery in 2023, Carvana's current share price remains significantly below its 2021 peak of $377. While the stock is trading at a considerable discount, we advise you neither to sell the stock amid the impressive rally nor to buy it, given the lingering uncertainties.
The challenges ahead are evident, with Carvana grappling with falling revenues, a decline in units sold, and a cautious outlook for fourth-quarter 2023 retail unit sales. Further, the shift toward prioritizing unit economics over growth raises concerns about cost management during potential expansion. In light of these factors, caution is warranted as Carvana navigates this complex landscape.
Zacks Rank & Key Picks
CVNA currently carries a Zacks Rank #3 (Hold).
A few better-ranked players in the auto space include Stellantis (STLA - Free Report) and Toyota (TM - Free Report) . While STLA sports a Zacks Rank #1 (Strong Buy), TM carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 11% and 45.4%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by $2.55 and 13 cents, respectively, in the past 60 days.
The Zacks Consensus Estimate for STLA’s 2023 sales and EPS implies year-over-year growth of 12.3% and 11.5%, respectively. The earnings estimate for 2023 and 2024 has been revised upward by 6 cents and 33 cents, respectively, in the past 30 days.