Bloomberg — An up-and-comer trying to become the Amazon of auto retailing is learning the hard way that, for all their digital shortcomings, American car dealers are formidable foes.
Carvana (CVNA) pitched itself as a leading e-commerce platform for used cars when it went public five years ago. Like Amazon, Netflix, Zoom and Peloton, its stock made for a popular pick during the pandemic. What better time to bet on a highly online business competing with brick-and-mortar stores that were either closed completely or unable to operate normally?
By August of last year, Carvana shares had soared above $370, valuing the company at more than $60 billion, almost three times greater than the market capitalization of top used-car retailer CarMax and eight times what AutoNation, the leading US auto-dealership chain, was worth. In the last nine months, the stock has come crashing down.
Investors overlooked the fact that, while selling or buying a car through Carvana can be done mostly online, there are serious limitations to digitizing the dirty work of inspecting and bidding for used vehicles, transporting them to be reconditioned, and oftentimes moving them again to where they’re resold. All of this is expensive and competitive work. Growing significantly faster than the retail chains and mom-and-pop dealers you’re competing with every day at auction sites, or for trade-ins from consumers shopping around online for the best offer, is no simple task.
Carvana pursued a grow-at-all-costs strategy to gobble up as much inventory as it could at a time when every player in the industry was feeling supply pressures and paying top dollar for used vehicles at auction. Automotive News noted early last year that, in roughly the same time it takes to brush one’s teeth, Carvana was buying or selling another car.
The reckoning came in February, when Carvana succumbed to the shortages sweeping the industry and reported its first-ever sequential decline in quarterly retail sales.
Carvana also announced a highly controversial acquisition for a company that prides itself on being extremely online, telling investors it would pay $2.2 billion for Adesa, one of America’s largest physical car-auction businesses. The seller, KAR Auction, said it was offloading 56 vehicle logistics centers across the US to focus on its digital offerings.
Meanwhile, Carvana’s consistently negative free cash flow has taken a turn for the worse: the company has burned through almost $4 billion since the beginning of last year. It’s assured shareholders that the Adesa acquisition should meaningfully reduce capital expenditures. Late last week, Carvana released a 53-page updated operating plan to rein in expenses and prioritize profitability and positive free cash flow.
Some of the biggest names on Wall Street are placing bets on whether Carvana can turn itself around. Last month, Apollo swooped in to salvage the junk-bond sale used to finance the Adesa acquisition. High-profile hedge fund Tiger Global Management was crushed early this year by the car retailer’s poor performance. On Monday, however, the firm disclosed having added to its stake.
Stanley Druckenmiller’s Duquesne Family Office, on the other hand, sold out of the stock. Famed short seller Jim Chanos told the Wall Street Journal that his firm Kynikos Associates, has been betting the shares will fall.
Analysts at JPMorgan — who cut their price target on the shares to just $35 on Monday, tied for the lowest among those compiled by Bloomberg — wrote that while Carvana has put to rest liquidity concerns for the time being, the stock is now a show-me story.
“We do not necessarily see the company’s business model as highly superior or disruptive to the market,” JPMorgan’s Rajat Gupta wrote, “with well-capitalized brick-and-mortar dealers finding ways to grow and generate solid returns in an increasingly competitive environment.”