Ernie Garcia insisted for years Carvana would become the world’s most profitable used car dealer by selling millions of vehicles online. But by the end of 2022 the company’s co-founder instead looked like another tech bro whose operating chops failed to match his bravado.
Carvana’s share price had fallen to $4 from $360 at its peak. Wall Street’s biggest vulture funds were circling in anticipation of a potential bankruptcy. Surging interest rates worsened affordability for used cars.
A company that had enticed investors as a digital disrupter, dispensing vehicles from illuminated glass towers, instead was at risk of becoming another victim of a low interest-rate environment that rewarded revenue growth at any cost.
Garcia vowed a high-speed U-turn. His company would slash costs and its heady ambitions for growth would take a back seat to proving efficiency. Remarkably, Carvana has avoided a looming financial abyss.
In 2023 Carvana reached its highest-ever gross profit per car sold ever as well as record, if modest, operating profits of $300mn. These results came even as it sold fewer cars — 300,000 compared with roughly 425,000 in 2021.
A deal cut with bondholders has given the company some financial breathing room. Carvana’s stock has rallied to $86, including an almost 10 per cent jump on Wednesday. Critics on social media have mostly gone quiet.
Carvana remains the most shorted stock in the automotive retail sector, with a third of its share float borrowed and sold. But bets against Garcia’s moves have proved painful. Short sellers have taken more than $3bn in losses in the past 15 months, according to calculations from research firm S3 Partners.
“Pressure makes you better,” Garcia, 41, said in an interview. “Pressure forces prioritisation and forces you to address things you might not have otherwise addressed.”
Carvana was formed as the internet spinout out of a conventional used car dealership chain named DriveTime, which had been founded by Garcia’s father and based in Phoenix, Arizona.
The younger Garcia noted Carvana faced plenty of sceptics after it went public in 2017.
Garcia recalled the comments he heard at the time included: “They are out of Phoenix, too capital intensive, couldn’t raise money, no one will finance a business that had a supply chain and financing [lending] component.”
He added: “That was a phase where I don’t think we were viewed as having bright prospects.”
The company slowly began to gain credibility in the late 2010s, Garcia said. Then the pandemic took the company to another level, as breakdowns in global supply chains created shortages of new cars which in turn boosted demand for used cars. Sales volumes at Carvana rose from 178,000 in 2019 to 425,000 by 2021, while its headcount quintupled from 4,000 to 21,000.
But used car prices surged as well, driving up Carvana’s cost of goods sold by 13 per cent in 2022, double the pace of revenue growth. High sticker prices also deterred consumers, while the Federal Reserve’s campaign against inflation through higher interest rates made monthly car payments unaffordable for some.
Even with record sales in 2021, Carvana did not generate positive free cash flow or net income. In late 2022, Garcia told Wall Street the company’s sole focus would be “unit economics”, where profits on the sale of every vehicle are high enough that Carvana would no longer be dependent on external financing to stay afloat.
In the fourth quarter of 2023, Carvana’s widely cited “gross profit per unit” hit $6,000, doubling from the lowest levels of 2022. The company slashed overhead costs by almost a third last year from a peak of $2.5bn in 2022. The employee count dropped to 14,000.
“The pace at which we brought down fixed and variable costs . . . we are very proud of the speed of that progress,” Garcia said.
Carvana, whose business historically relied heavily on originating and then selling on car loans, has also benefited from a strong US consumer and stabilising interest rates.
Wall Street analysts have been impressed as the company’s market capitalisation has bounced back to $16bn, but they now wonder if the company can rapidly increase unit sales while keeping spending in check.
“Carvana needs to grow immensely to justify its valuation,” wrote analysts at Wedbush Securities, who at the same time lauded its “impressive improvements in operations”.
Jared Rose, a Canadian investor at Gravity Partners Capital Management and longtime Carvana bear, said Carvana “has been valued on a multiple of sales like a tech company, as opposed to book value or earnings like the lender and auto retailer it is”.
The elder Garcia had drawn the attention of Carvana shareholders when selling several billion dollars of the company’s stock during the 2021 run-up. As a part of a 2023 balance sheet restructuring where creditors took haircuts to their principal amounts, the Garcia family agreed to purchase more than $100mn of new stock at a price of $46 a share, an investment that has proved profitable.
With an overall gross debt balance of more than $7bn, the company will need to make continued progress. Carvana’s bondholders, including the likes of Apollo Global Management, in last year’s restructuring agreed to let the company defer cash interest payments until 2025, saving the company more than $400mn a year.
Garcia has repeatedly pointed out the US used car market has been stable at about 40mn vehicles sold per year and Carvana, even at its peak sales volume, only had 1 per cent of it. If the company could fully master the execution of acquiring used cars and then matching them with buyers around the country via smartphones, the opportunity remains enormous.
The lesson of Carvana’s wild swings over the past decade, Garcia said, is to stay focused on basic goals and accountability in achieving them.
“The error of smart and ambitious people is to overcomplicate and take on too much,” he said.
