Carvana trades in its unprofitable model

Used-car retailer (vending machine) Carvana is trading in its old cash-guzzler business model for a new profitable one.

What’s the big deal? During COVID, Carvana’s stock soared alongside rising used car demand and prices. Last year, that quickly reversed as investors shunned unprofitable growth stocks — sending Carvana down nearly 90% and now trading below its 2018 levels.

• Last week, Carvana released a new operating plan highlighting ways to reduce costs and achieve profitability.
• But many are still skeptical about whether they can execute — and management has loaded up Carvana with even more debt to fund acquisitions.

Swerving out of control: Losses ballooned from barely making an $82M operating income in the 2021 second quarter — to losing $401M in the recent quarter.

• Per Petition, “Carvana couldn’t make money in the most favorable environment for used cars” — i.e., stimulus checks, limited public transit and high used car prices.
• In its recent report, revenue grew 56% despite only selling 14% more autos due to higher car prices.

The new focus is to increase profitability — and here’s how they plan on doing it.

1/ Reduce their selling, general and administrative expenses from $4,700 per retail unit to $3,000.

2/ Save $125M annually (~25% of their last 12-month losses) by laying off 12% of their employees.

3/ Cut their capital investments budget from $220M in the previous quarter to $50M by the end of 2022.

Looking forward: With a potential recession looming and rising interest rates, a highly unprofitable model is one of the last stocks you want to be driving.