It's almost difficult to believe the roller coaster story that is Carvana (CVNA -0.69%). It went on the wildest of rides during the COVID-19 pandemic and soared beyond any measure investors would have thought possible, only to crash to near bankruptcy. But the company survived, and began working to tighten up its operations and focus on profitability.
So is it finally a stable enough stock to buy now?
Sinking or soaring?
Investors that merely glance at a few graphs might be confused as to why you would buy Carvana right now, especially considering its slowing retail sales growth. In fact, Carvana's annual retail units sold have declined since 2021, from 425,237 units down to 412,296 units in 2022 down to 312,847 in 2023.
That looks like a red flag until you realize the company was previously expanding far too quickly -- and too expensively. It pulled back on its retail sales growth to focus on more profitable sales, all while improving the efficiency of its operations. The results on its gross profit per unit (GPU) are impressive.
Image source: Carvana's 2023 letter to shareholders.
While Carvana's retail units sold slid far lower in 2023, it was actually a strong year for the company. In fact, comparing 2021 and 2023, the company set a new record for full-year total GPU at $5,500 in 2023, roughly $1,000 higher than its previous record in 2021.
Improved financials
One of the most impressive figures from Carvana was that it cut over $1.1 billion of annualized SG&A expenses from its operations since the peak in early 2022 through 2023, and the gains are continuing into early 2024. That all comes from the company's focus on improving efficiency while it pivoted from fast growth to profitable growth.
Also hugely important was the company's move to restructure its debt and save roughly $430 million in annual interest expense, boosting its liquidity. 2023 was also a record year for its adjusted EBITDA, which totaled $339 million, or 3.1% of revenue.
Is it time to buy?
Fast forwarding to more current results, the company recently reported its first quarter, in which it delivered the best results in company history. It reported net income of $49 million in the first quarter, a massive improvement from the prior year's $286 million loss -- though part of that was a $75 million gain on the value of stock warrants in an insurance company it partnered with in 2021. The results sent its stock price soaring.
Ultimately, Carvana operates in a hugely fractured used car retail market, and as it improves efficiency even further, it can provide consumers even more benefits to shopping with Carvana. It has a proven go-to-market strategy at a time consumers are more willing to buy a car online.
While the used car retailer's stock price might not see the highs it did during COVID-19 anytime soon, there can still be immense upside if the company begins to crank up its retail unit sales volume while remaining as efficient as ever. The trick will be to expand efficiently and into markets that make sense, or it could falter and fall in the same track it did around COVID-19 by expanding too quickly. It finally seems like now might be a good time to buy a more financially stable and more profitably growing company.
