CARVANA CO-REDH CVNA S
May 04, 2017 - 9:16pm EST by
jer1225
2017 2018
Price: 10.00 EPS 0 0
Shares Out. (in M): 137 P/E 0 0
Market Cap (in $M): 1,370 P/FCF 0 0
Net Debt (in $M): -50 EBIT 0 0
TEV ($): 1,320 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

Carvana is a leading eCommerce platform for buying used cars. The business has explosive growth, but I believe operating losses and significant working capital requirements will quickly overwhelm a weak balance sheet (~$210M of cash) and the Company could go bankrupt or be forced to issue lots of dilutive equity. The short thesis here is relatively straight forward and I look forward to hearing what others think about the following observations regarding this lemon.

1. Carvana is growing sales rapidly with Q1 2017 revenue guided up 117%, but they operate on very thin gross profit margins - ~$1,100 per car. Gross profit per car has been roughly flat since Q1 16, despite significantly higher sales.

2. They actually earn almost no gross profit on the cars, but generate the majority of the gross profit from service contracts and loans sold to a related party, DriveTime, controlled by the CEO. These “other gross profits” were sold to third parties prior to December 9, 2016 (a few months before the IPO) but they started selling them to themselves through a Master Dealer Agreement that was “not negotiated at arms length.” I have no evidence of fraud, but this change is highly fishy.    

3. Assuming the gross profit is real, they spend ~$5,800 in SG&A to generate $1,100 of gross profit per car, leading to $(4,700) of EBIT lost per car sold. They lose money on every car but are trying to make it up on volume.

4. SG&A as a % of sales has been flat at ~30% in 2015, 2016 and Q1 2017. They present misleading cohort analysis showing that advertising as a % of sales is lower in older markets, but this is misleading as advertising is only 7% of sales. Even if advertising was zero, they would still lose money on every sale.

5. Used care prices is declining. With already this margins and too much SG&A per car, this deflation creates a tough headwind.

6. This is not a software company. It is a highly capital intensive car dealer. Inventory build consumed $117M of cash in 2016 with inventory being ~50% of sales.

7. So here is my cash bridge. 210M of cash to start. Less 155M of operating losses (Q1 17 *4) = 55M of cash. Assuming sales double, requires $185M of inventory and they spend ~$40M on capex =  negative $170M. Said another way, CFO less capex was ($280M) in 2016 and getting worse as working capital need grow.

I think they will run out of money in a few quarters.    

8. The company has a dual class voting structure, so shareholders have no voice in governance and the 34 year old CEO is in charge

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Running out of cash

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    Description

    Carvana is a leading eCommerce platform for buying used cars. The business has explosive growth, but I believe operating losses and significant working capital requirements will quickly overwhelm a weak balance sheet (~$210M of cash) and the Company could go bankrupt or be forced to issue lots of dilutive equity. The short thesis here is relatively straight forward and I look forward to hearing what others think about the following observations regarding this lemon.

    1. Carvana is growing sales rapidly with Q1 2017 revenue guided up 117%, but they operate on very thin gross profit margins - ~$1,100 per car. Gross profit per car has been roughly flat since Q1 16, despite significantly higher sales.

    2. They actually earn almost no gross profit on the cars, but generate the majority of the gross profit from service contracts and loans sold to a related party, DriveTime, controlled by the CEO. These “other gross profits” were sold to third parties prior to December 9, 2016 (a few months before the IPO) but they started selling them to themselves through a Master Dealer Agreement that was “not negotiated at arms length.” I have no evidence of fraud, but this change is highly fishy.    

    3. Assuming the gross profit is real, they spend ~$5,800 in SG&A to generate $1,100 of gross profit per car, leading to $(4,700) of EBIT lost per car sold. They lose money on every car but are trying to make it up on volume.

    4. SG&A as a % of sales has been flat at ~30% in 2015, 2016 and Q1 2017. They present misleading cohort analysis showing that advertising as a % of sales is lower in older markets, but this is misleading as advertising is only 7% of sales. Even if advertising was zero, they would still lose money on every sale.

    5. Used care prices is declining. With already this margins and too much SG&A per car, this deflation creates a tough headwind.

    6. This is not a software company. It is a highly capital intensive car dealer. Inventory build consumed $117M of cash in 2016 with inventory being ~50% of sales.

    7. So here is my cash bridge. 210M of cash to start. Less 155M of operating losses (Q1 17 *4) = 55M of cash. Assuming sales double, requires $185M of inventory and they spend ~$40M on capex =  negative $170M. Said another way, CFO less capex was ($280M) in 2016 and getting worse as working capital need grow.

    I think they will run out of money in a few quarters.    

    8. The company has a dual class voting structure, so shareholders have no voice in governance and the 34 year old CEO is in charge

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Running out of cash

    Messages


    SubjectBorrow
    Entry05/24/2017 02:06 PM
    MemberReaper666

    I thought it was an interesting idea, but I checked with my broker and there is under 100K shares to borrow at over a 24% rate.  SO that's too risch and too samll for me, but I'm curious about their lockup, do you know long it is and how many shares will be unlocked?  It might be worth looking at, if I think the borrow will be avialable down the road.


    SubjectRe: more q's
    Entry06/07/2017 11:20 AM
    MemberMencken

    $3k in GP per used vehicle is too high -- NADA and NIADA is more like $2.5k, and that's with the non-transparent pricing, generally unpleasant dealership experience, and fact that most of the dealership money is made on servicing and parts (so they can afford to "give" on the GP $ / used car). New cars more like $2k / vehicle.

    A low-cost AMZN-like model would maybe suggest $1.0-1.5k in GP $/vehicle.

    Also, unless you have a view that they'll be able to rely more on word-of-mouth advertising, I'd tick your marketing $ / unit up to NADA's $600-650 too.


    SubjectRe: Re: Re: more q's
    Entry06/07/2017 01:19 PM
    MemberMencken

    Carmax: "We are one of the nation’s largest operators of wholesale vehicle auctions...."

    Carvana

     

    Advertising / Vehicle (used slightly less):

     


    SubjectRe: Borrow
    Entry06/07/2017 10:20 PM
    Memberu0422811

    Lockup expires on October 25th.  Given the performance you can probably throw out the posisbility of a secondary.  


    SubjectRe: Re: Borrow
    Entry08/08/2017 01:22 PM
    MemberThor25

    Any thesis update here? The stock is up 80% since they reported the first quarter out of the gate, and management bought a lot of stock lower.

    I tend to agree that this model seems unlikely to scale particularly easily (particularly since it will consume cash as inventory levels increase) given truck rolling cars to people's homes. However, consumers seem to like the product and their traffic has been strong. I'm interested but not sure the risk reward is right to be short particularly with the rebate.

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