HomeMost PopularCarvana: An Ineffective Business Model Leading Nowhere

Carvana: An Ineffective Business Model Leading Nowhere

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Carvana used car vending machine. Carvana is an online only preowned and used car dealership I

Carvana (NYSE:CVNA) achieved its best quarter to date, but the question remains: can the โ€œnew Carvanaโ€ sustain its success in the future? Carvanaโ€™s recent quarter involved financial engineering to address its mounting debt burden, but the real test lies in its ability to thrive moving forward.

Examining the Quarterly Results

While Carvanaโ€™s headlines may indicate a remarkable turnaround, a closer look reveals a less impressive reality. The company reported a total gross profit per unit of $6,520, a 94% increase from the previous quarter. However, when considering non-recurring expenses, the total non-GAAP gross profit per unit rose even higher to $7,030. Itโ€™s worth noting that relying on self-defined metrics for success can be misleading. When using GAAP measurements, the latest quarterโ€™s gross profit of $500 million showed a significant improvement, up by 26% from Q2 2022.

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Data by YCharts

Carvana narrowed its net loss margin to 3.5%, a significant improvement from 11.3% in 2022. However, itโ€™s important to consider the unique challenges the used car market faced in that year. Despite the progress, Carvanaโ€™s net loss remains higher than the pre-COVID figure of 9.3%.

Investor presentation

The primary factor driving Carvanaโ€™s improved EBITDA and net income is its aggressive reduction of SG&A expenses, compensated by declining revenues. The company has managed to cut annual SG&A costs by $1.1 billion and identified further opportunities for cost reduction through enhanced efficiency and technology. Consequently, Carvana plans to reduce advertising expenses by $21 million. However, cost-cutting alone cannot solve its underlying failing business model.

Carvanaโ€™s Continuing Business Model Concerns

The window of opportunity for Carvana to disrupt the used car buying industry may have closed. Larger corporations and other incumbents have embraced online vehicle delivery due to the COVID-19 pandemic, resulting in increased competition. CarMax, the nationโ€™s largest used car retailer, has also shifted a portion of its business online and offers delivery services. In comparison, Carvana appears overvalued and lacks the necessary financial metrics to support its business.

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Data by YCharts

With local dealerships already equipped with online capabilities, Carvana would need a stronger brand presence to gain market share. However, the companyโ€™s current focus on cost-cutting could result in losing market share to other online car dealerships. Additionally, Carvanaโ€™s novelty features, such as the car vending machine, may not compensate for poor customer experiences, including late car registrations. Several states have even banned the companyโ€™s operations due to such issues. It remains uncertain how the customer experience will fare amid aggressive cost-cutting measures.

Conclusion

In order to succeed, Carvana must aggressively expand its business. However, the companyโ€™s history of consistent losses, coupled with cost-cutting during a sales decline, does not inspire confidence. Currently trading at 2.5x sales, Carvana had an opportunity to disrupt the online car sales market, but local dealerships have swiftly adapted to online selling due to the pandemic. Unless Carvana can differentiate itself from its competitors, it will struggle to stand out aside from its gimmicks.

Source: Seekingalpha.com

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