A stock splitting five ways following Carvana’s year has an almost theatrical quality. With traders still getting used to the new math, the shares ended Friday at $77.94, slightly lower. Prior to the split, the sticker price was close to $400. It now fits inside a retail brokerage account more comfortably. The business is the same business. On paper, the valuation hasn’t changed. However, there’s a feeling that Wall Street has noticed a shift in psychology.
It’s worth taking a moment to consider how peculiar this return is. A short time ago, Carvana appeared to be one of those businesses that would eventually be featured in business school slide decks as a case study, similar to Pets.com. Debt was piled high. In Tempe and Phoenix, sun-bleached cars waited in parking lots. Once considered eccentric and futuristic, the well-known glass car vending machines began to resemble artifacts from a bygone era of cheap money. Then, for some reason, the business managed to recover.
Part of that story, but not all of it, is revealed by the first-quarter numbers. $6.43 billion in revenue, a 52% increase from the previous year. $405 million in net income. CEO Ernie Garcia noted that the 40% increase in retail units sold was the sixth consecutive quarter of growth at that rate or higher. Recovery numbers are not those. These are numbers for expansion. Although the more cautious analysts at Simply Wall St. have identified a $2.8 billion tax benefit that made earnings appear better than they likely are underneath, investors appear to think the turn is real.
Marvin Fong of BTIG changed his price target from $485 to $97 while maintaining the Buy rating; this is primarily due to bookkeeping for the split rather than a reduction in conviction. Sharon Zackfia of William Blair persisted in her buy recommendation as well, but she cited credit trends and inventory depreciation as the factors that make her wary. Reading these notes gives me the impression that analysts no longer write about Carvana in the same manner. The phrase “doomsday” has vanished. It has been replaced by something more cautious—interest combined with caution.
The operational picture outside the Tempe office is more disorganized than the headline numbers indicate. The variable that can make or break a quarter is reconditioning costs, which include the inspection, repairs, washing, polishing, and photography before a car is put back online. The company was operating “just shy” of its peak labor efficiency in April, Garcia told analysts. That phrase has a lot of meaning. It implies that the group is aware of the ceiling and has not yet reached it.
Carvana is currently benefiting from the used car market itself. In the United States, new car prices are close to $50,000, which is sufficient to drive a sizable portion of consumers into the used car market. The older, slower, more traditional competitor, Carmax, also saw some gains on Friday. The secondhand demand appears to be structurally sticky, but there isn’t a general rally that is helping everyone—ACV Auctions actually declined. Cars are still necessary for people. Simply put, they would prefer not to finance a new one at these rates.
The cultural echo is difficult to ignore. Years ago, when Wall Street continued to evaluate Tesla using a standard intended for established automakers, the company faced similar skepticism. Electric vehicles are not the used car industry, and Carvana is not Tesla. However, the skepticism’s form is recognizable: the disbelief, the lack of interest, and the unanticipated catalysts. The next two or three quarters will determine whether the comparison makes Carvana happy or sets it up for failure.
Back in March, a death cross appeared on the technicals, which some traders take seriously while others completely ignore. The longer-term question is still pragmatic and unglamorous, regardless of your opinion of chart patterns. Can Carvana continue to sell more cars, condition them more quickly, and extract a little more gross profit from each one? The test is that. Purchasing the shares was made simpler by the split. It didn’t make operating the business any simpler.
