Can Carvana Pull Off a Comeback?

Carvana, a poster child for post-pandemic breakdowns, is suddenly revving up again.

The vending-machine-for-used-cars company posted stellar results in its latest earnings call, leaving many analysts to wonder if this may be the start of something new.

Drive to Survive

Like many companies in the growth-over-profit COVID-19 class that promised to replace real-life experiences with digital alternatives, Carvana got crushed once its growth engine started rumbling and investors got a look at the pedestrian margins under the hood. After an August 2021 peak, its share price tumbled a shocking 99% over a roughly 16-month stretch, sparking fears of bankruptcy. Of course, a rapid spike in interest rates didn’t help.

But next thing you know, there’s a turnaround. Revenue of $3.4 billion beat Wall Street’s expectations, while the sale of over 100,000 used cars marked a 33% improvement from the same quarter a year ago. As it turns out, Carvana’s fortunes may just be closely tied to the used-car market (shocking, we know). And after a couple years that now look downright ludicrous in the rearview mirror, said used-car market is finally settling back into a reasonable state:

• According to Cox Automotive’s Manheim used-car index, the price of a used car in the first half of July was down nearly 7% year-over-year, with decreases seen across all categories.
• Prices increased around 66% between January 2020 and January 2022 after increasing just 17% in the decade prior. Since the start of 2022, prices have declined 23% overall.

Zero to 60: In other words, used cars are starting to tip back toward a buyer’s market. That’s good news for Carvana, which saw its gross profit per unit take a massive spike in the latest quarter, from $529 to $7,049. On Thursday, its share price spiked nearly 10% following a nearly 15% increase on Wednesday; it’s up 3,100% since the start of 2023. Some analysts say the trend will only continue. “After a volatile past we see [Carvana] becoming a profitable secular growth story, with increasing retail unit sales and improving gross profit per unit metrics from leveraging a high-fixed-cost base,” Needham analyst Chris Pierce wrote in a note last month.