Carvana Co.
Summary
- Carvana is an e-commerce platform for buying and selling used cars in the United States
- Carvana was founded by Ernest Garcia III, Ryan Keeton and Ben Huston in 2012.
- Carvana Co. operates through three revenue-generating segments: Retail Vehicle Sales, Wholesale Vehicle Sales and Other Revenues.
- In 2022, for the year ended 31 December 2022, Carvana reported an increase in revenue by $790 million compared to the previous year. The total revenue for 2022 amounted to $13,604 million, reflecting a 6% change from the $12,814 million reported in 2021.
- As of September 2023, the return on equity (ROE) and earnings per share (EPS) of Carvana are 230% and $7.05, respectively. The gross margin is 17.38%, the operating margin is 1.77%, and the net margin is 26.72% due to a significant gain from loan extinguishment.
Brief Company Overview
Carvana Co. (NYSE:CVNA) is an e-commerce platform for buying and selling used cars in the United States. The company offers many used cars, including sedans, trucks, SUVs, and luxury vehicles. Carvana was founded by Ernest Garcia III, Ryan Keeton and Ben Huston in 2012. The company's initial funding round came from the used car retailer and finance company DriveTime. The company is headquartered in Tempe, Arizona. Its platform allows customers to research and identify a vehicle, inspect it using the company's 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle, and schedule delivery or pick-up from their desktop or mobile devices. Carvana Co. operates through three segments: Retail Vehicle Sales, Wholesale Vehicle Sales and Other Revenues. The company serves customers across the United States who are looking to buy or sell used cars.
In April 2017, the company went public and began trading on the New York Stock Exchange under the symbol CVNA.1 Carvana acquired rival automotive startup Carlypso to enhance vehicle data and analytical tools in 2017. The following year, Carvana spent $22 million to acquire Mark Cuban-backed Car360 for its smartphone technology for taking vehicle photos with 3D computer vision, machine learning, and augmented reality. In 2022, Carvana acquired ADESA, the nation’s second-largest wholesale auto auction chain, for $2,200 million to increase its real estate footprint.2 Carvana Co. is the second-largest used automotive retailer in the U.S. and has reconditioned and sold more than 1 million used vehicles to customers through its online platform. The CEO of Carvana Co. is Ernest Garcia III. Carvana Co. had 16,600 employees on December 31, 2022. The revenue per employee was $673,735. As of September 2023, the return on equity (ROE) and earnings per share (EPS) of Carvana are 230% and $7.05, respectively.
The company does not pay any dividends. As of September 2023, Carvana Co. has 110.84 million shares outstanding. As of September 29, 2023, Carvana Co. had 313 institutional shareholders. The top 10 institutional shareholders held 57.68% of the total shares, with Morgan Stanley being the largest shareholder with 14,756,510 shares. The 52-week share price range is between $21.46 to $41.98. The trailing PE is 5.95, the gross margin is 17.38%, the operating margin is 1.77%, and the net margin is 26.72% due to a significant gain from loan extinguishment.
Recent Developments
- On August 16, 2023, Carvana debuted its newest iconic Car Vending Machine in Hollywood, Florida, near Miami-Dade and Fort Lauderdale.3
- On August 08, 2023, Carvana debuted Carvana Value Tracker, a free tool to quickly obtain a vehicle valuation and track a vehicle’s value against evolving market conditions.
- On 20 July 2023, Carvana announced a significant collaboration with one of Hollywood’s most charismatic couples, Kristen Bell and Dax Shepard, to show how Carvana’s simple online process has improved the car buying and selling experience, making it fair, easy and fun.
- On March 29, 2023, Carvana opened its first vending machine in New York on Long Island near Garden City, bringing the company’s national total in operation to 35 at the quarter's end.
- In May 2022, Carvana acquired ADESA U.S., the second-largest U.S. wholesale used vehicle auction marketplace. ADESA’s wholesale marketplace generated significant gross profit in Q1 2023, a long‐term addition to total gross profit.
Recent Financing Activities
- On July 19, 2023, Carvana entered into a transaction support agreement with a group of noteholders representing over 90% of the aggregate principal amount outstanding of the Company’s existing senior unsecured notes to provide the company significant flexibility as it continues to execute its profitability and growth plan by reducing total debt, extending maturities and lowering near-term cash interest expense.
- On 21 August 2023 Carvana completed all equity capital requirements of its previously announced exchange offer transaction support agreement by raising $126 million of equity capital (the “Garcia Equity Transaction”) from existing shareholders Ernest Garcia II and Ernest Garcia III, Carvana’s Chief Executive Officer (the “Garcia Parties”), in a transaction valuing the Company’s Class A common stock at $46.31 per share (the “Equity Value”), an 18% premium to the closing price on August 18, 2023.
- On September 1, 2023, the company closed the previously announced corporate debt exchange with approximately 96.4% of noteholders agreeing to exchange $5,520 million of the unsecured notes for cash or new senior secured notes, reducing total debt by over $1,325 million, extending maturities, and decreasing required cash interest payments by more than $455 million per year for the next two years.
Financial Performance Highlights
Q3 2023 Highlights
For the quarter ended 30 September 2023, retail units sold totalled 80,987, a decrease of 21% compared to Q3 2022. Revenue totalled $2,773 million, a decrease of 18% compared to Q3 2022. Total gross profit was $482 million, an increase of 34% compared to Q3 2022. Total gross profit per unit (“GPU”) was $5,952, an increase of $2,452 compared to Q3 2022. Net income margin was 26.7%, a sequential improvement of 30.2% compared to Q3 2022. Net income totalled $741 million and benefitted an $878 million gain on debt extinguishment as a result of the corporate debt exchange. Adjusted EBITDA margin was 5.3%, a sequential improvement of 0.1% compared to Q3 2022. Adjusted EBITDA totalled $148 million, including $40 million of non-recurring benefits. Basic and diluted earnings per Class A share were $7.05 and $3.60, respectively, based on 111 million and 206 million shares of Class A common stock outstanding, respectively. The company does not pay any dividends.
Annual Performance Highlights
In 2022, for the year ended 31 December 2022, Carvana reported an increase in revenue by $790 million compared to the previous year. The total revenue for 2022 amounted to $13,604 million, reflecting a 6% change from the $12,814 million reported in 2021. The gross profit for 2022 stood at $1,246 million, resulting in a 35% decrease from the $1,929 million recorded in 2021. The gross margin, calculated as a percentage of revenue, decreased from 15.05% in 2021 to 9.16% in 2022. The net loss for 2022 was $2,894 million, indicating a 908% increase in loss from the $287 million net loss reported in 2021. This change can be attributed to an increase in the cost of sales, operating expenses, goodwill impairment and interest expenses. The operating loss in 2022 reached $2,337 million, with a 2147% increase in loss from the $104 million reported in 2021. The operating margin (loss) increased from a 0.81% loss in 2021 to a 17.81% loss in 2022. The net margin for 2022, calculated as the ratio of net profit to revenue, was (21.27%), compared to (2.24%) in 2021. The earnings per share was equal to ($15.74) in 2022 and ($1.63) in 2021. Carvana recorded a goodwill impairment in 2022 amounting to $847 million for the completion of the ADESA Acquisition using the acquisition method of accounting based on their fair values as of the date of completion of the ADESA Acquisition and record the excess, if any, of the purchase price over those fair values as goodwill. This had a notable impact on the overall financial performance.
The cash flow statement reveals negative trends in cash flows during the year ended 31 December 2022. Operating, investing, and financing activities experienced notable changes. The net cash used in operating activities was $1,324 million and $2,594 million in 2022 and 2021, respectively. The net cash used in investing activities was $2,583 million and $627 million in 2022 and 2021, respectively. The net cash received from financing activities was $3,899 million and $3,528 million in 2022 and 2021, respectively. The depreciation and amortisation of Goodwill was higher in 2022 compared to 2021. The Vehicle inventory declined in 2022, whereas the inventory increased in 2021. The company took part in a business acquisition amounting to $2,196, significantly impacting the company's investing activities. During 2022, there have been $1,227 in proceeds from the issuance of Class A stock and no proceeds in 2021.
The largest source of revenue, retail vehicle sales, totaled $10,254 million and $9,851 million during the years ended December 31, 2022, and 2021, respectively1. Subsequent to the acquisition of the U.S. physical auction business of ADESA from KAR on May 9, 2022, Carvana also include revenue earned for the sale of wholesale marketplace units by non-Carvana sellers through the wholesale marketplace platform, including auction fees and related service revenues, in wholesale sales and revenues. Wholesale sales and revenues totalled $2,609 million and $1,920 million during the years ended December 31, 2022, and 2021, respectively. Other sales and revenues, which primarily include gains on the sales of automotive finance receivables the company originates and sales commissions on ancillary products such as VSCs, GAP waiver coverage, and auto insurance, totalled $741 million and $1,043 million during the years that ended December 31, 2022, and 2021, respectively.
Retail vehicle sales increased by $403 million to $10,254 million in 2022, compared to $9,851 million in 2021. This increase was primarily due to an increase in the average selling price of retail units, which reached $24,870. However, the number of retail vehicles sold decreased to 412,296 from 425,237 in 2021 and 2022, driven by macroeconomic factors such as increased interest rates and inflation, which led to decreased vehicle affordability. The overall increase in revenue was partly offset by the decrease in retail vehicle sales.
Wholesale vehicle sales increased by $689 million to $2,609 million in 2022, compared to $1,920 million in 2021. The ADESA Acquisition led to a total of 485,333 units sold, totalling $490 million in wholesale marketplace revenue. The number of units sold increased to 193,260 from 170,056 in 2022 and 2021, while the average selling price decreased to $10,965 from $11,287 in 2022 and 2021. The increase in units sold was primarily due to customers acquiring more vehicles, while the lower average selling price was primarily due to depreciation in the used vehicle market.
The sales and revenues of other businesses decreased by $302 million to $741 million in 2022, compared to $1,043 million in 2021. This decline is primarily due to fewer loan sales, rising interest rates, and a decrease in retail units sold. However, higher vehicle prices partially offset this decline, resulting in a slight increase in average loan size.
Business Overview
Carvana is the leading e-commerce platform for buying and selling used cars. The company is transforming the used car buying and selling experience by giving consumers a wide selection, great value and quality, transparent pricing, and a simple, no-pressure transaction. The company was the fastest-growing online used car dealer in the United States and was named to the 2021 Fortune 500 list, one of the youngest companies to be added to the list. Carvana’s business model is to provide a convenient, transparent, and hassle-free way to buy and sell used cars. The business is driven by data and technology at all stages of the process, from inventory purchasing, reconditioning, photography, and annotation through online merchandising, sales, automobile financing, trade-ins, logistics, and delivery. The transaction technologies and online platform transform a traditionally time-consuming process by allowing customers to secure financing, complete a purchase or sale, and schedule delivery or pick-up online in as little as 10 minutes.
The company offers different variants of used cars, including sedans, SUVs, wagons, coupes, convertibles, hatchbacks, minivans, and trucks. Carvana also offers vehicle financing, vehicle warranty coverage, vehicle service contracts, automated vehicle valuations, and GAP waiver coverage. As of December 31, 2022, Carvana offers all customers a nationally pooled inventory of over 63,000 high-quality used vehicles on its website. The company evaluates and reconditions all the vehicles it owns and offers for sale. Since launching Carvana ten years ago, the growth strategy has vaulted Carvana to being the second-largest used automotive retailer in the U.S. for the year ending December 31, 2022. The long-term strategy is to continue growing the vehicle unit sales, market penetration, number of markets, and complementary product revenues while enhancing competitive positioning.
Carvana operates through three segments: retail vehicle sales, wholesale vehicle sales and other sales and revenues.
Retail Segment
Carvana's retail segment is the main source of its revenue and growth. It consists of revenues from retail sales of used vehicles to consumers through its e-commerce platform. Since launching to customers in Atlanta, Georgia, in January 2013, Carvana has historically experienced rapid growth in sales through its website, www.carvana.com1. Due to macroeconomic impacts, including rising used car prices and interest rates, during the year ended December 31, 2022, the number of vehicles Carvana sold to retail customers decreased by 3.0% to 412,296, compared to 425,237 in the year ended December 31, 2021.
Carvana’s retail segment operates on a platform that allows customers to research and identify a vehicle, inspect it using interactive high-definition photography, obtain financing and warranty coverage, purchase the vehicle, and schedule delivery or pick-up, all from its online platform. Carvana sources its vehicles from auctions, trade-ins, partnered dealerships, and individuals. It also reconditions and repairs the vehicles before selling them to customers. Carvana offers a 7-day return policy and a 100-day limited warranty for its retail customers1. The number of retail vehicles it sells depends on the volume of traffic to the website, population coverage, inventory selection, the effectiveness of branding and marketing efforts, the quality of customer's purchase experience, the volume of referrals and repeat customers, the competitiveness of pricing, competition from other used car dealerships and general economic conditions. On a quarterly basis, the number of retail vehicles it sells is also affected by seasonality, with demand for retail vehicles generally reaching a seasonal high point late in the first quarter of each year, commensurate with the timing of tax refunds, and diminishing through the rest of the year, with the lowest relative level of retail vehicle sales generally expected to occur in the fourth calendar quarter. However, in 2022, heightened inflation and rising interest rates have resulted in lower demand for used vehicles.
Retail vehicle sales increased by $403 million to $10,254 million during the year ended December 31, 2022, compared to $9,851 million during the year ended December 31, 2021. The increase in revenue was primarily due to an increase in the average selling price of its retail units sold to $24,870 in the year ended December 31, 2022, from $23,167 in the prior year, due primarily to overall appreciation in the used vehicle market compared to the year ended December 31, 2021. This increase was partly offset by a decrease in the number of retail vehicles sold to 412,296 from 425,237 during the years ended December 31, 2022 and 2021, respectively. The decrease in retail units sold was driven by various macroeconomic factors, including increased interest rates and inflation, leading to decreased vehicle affordability.
Wholesale Segment
The wholesale segment of Carvana is a secondary source of its revenue and growth. It consists of revenues from wholesale sales of vehicles, primarily from customers who trade in their existing vehicles when making a used vehicle purchase and who don’t meet Carvana’s quality standards to list and sell through its website to wholesalers. This revenue is recognised when the vehicle is sold at auction or directly to a wholesaler.
Wholesale sales and revenues include the aggregate proceeds Carvana receives on vehicles it acquires and sells to wholesalers. The vehicles Carvana sells to wholesalers are primarily acquired from customers who sell a vehicle to the company without purchasing a retail vehicle and from the customers who trade in their existing vehicles when making a purchase from the company. Factors affecting wholesale sales and revenues include the number of wholesale units sold and the average wholesale selling price of these vehicles. The average selling price of the wholesale units is primarily driven by the mix of vehicles Carvana sells to wholesalers and the general supply and demand conditions in the applicable wholesale vehicle market. Wholesale sales and revenues include aggregate proceeds Carvana receives on vehicles sold to DriveTime through competitive online auctions that are managed by an unrelated third party and through the Company's wholesale marketplace platform. Wholesale marketplace revenues include revenue earned from selling wholesale marketplace units by third-party sellers through the wholesale marketplace platform, including auction fees and related services revenue.
Wholesale vehicle sales increased by $689 million to $2,609 million during the year ended December 31, 2022, compared to $1,920 million during the year ended December 31, 2021. The increase in revenue was primarily driven by the ADESA Acquisition, resulting in 485,333 wholesale marketplace units sold, for a total of $490 million in wholesale marketplace revenue. Additionally, wholesale units sold increased to 193,260 from 170,056 during the year ended December 31, 2022, and 2021, respectively, partially offset by a decrease in the average selling price of its wholesale units sold to $10,965 from $11,287 during the years ended December 31, 2022, and 2021, respectively. The increase in wholesale units sold was due to acquiring more vehicles from customers, while the lower average selling price was primarily due to depreciation in the used vehicle market compared to the year ended December 31, 2021.
Corporate Operation and Other Segments
Carvana generates other sales and revenues primarily through the sales of loans it originates and sells in securitisation transactions or to financing partners, reported net of a reserve for expected repurchases, commissions it receives on VSCs (Vehicle Service Contracts), sales of GAP waiver coverage, and commissions and warrants it receives on sales of auto insurance. In 2016, Carvana entered into a master dealer agreement with DriveTime, pursuant to which it receives a commission for selling VSCs that DriveTime administers. The commission revenue Carvana recognises on VSCs depends on the number of retail units it sells, the conversion rate of VSCs on these sales, commission rates Carvana receives, VSC's early cancellation frequency, and product features. The GAP waiver coverage revenue Carvana recognises depends on the number of retail units Carvana sells, the number of customers that choose to finance their purchases with Carvana, the frequency of GAP waiver coverage early cancellation, and the conversion rate of GAP waiver coverage on those sales. In September 2022, Carvana partnered with Root to offer an integrated auto insurance solution through which customers can conveniently access auto insurance directly from the Carvana e-commerce platform. Other sales and revenues, which primarily include gains on the sales of automotive finance receivables Carvana originates and sales commissions on ancillary products such as VSCs, GAP waiver coverage, and auto insurance, totalled $741 million and $1,043 million during the years that ended December 31, 2022, and 2021, respectively. The company generally expects other sales and revenues to trend proportionately with retail units sold. Other sales and revenues are 100% gross margin products for which gross profit equals revenue.
Other sales and revenues decreased by $302 million to $741 million during the year ended December 31, 2022, compared to $1,043 million during the year ended December 31, 2021.
The decrease is primarily due to fewer loan sales, a decrease in gain on loan sales driven by rapidly increasing benchmark interest rates, and the impact of the decrease in retail units sold, partially offset by the impact of higher industry-wide vehicle prices on average loan size during the year ended December 31, 2022.
Other Information
Carvana’s competitive advantages include its innovative technology, customer-centric approach, scalable infrastructure, and data-driven operations. The company has also made strategic acquisitions and partnerships to enhance its capabilities and reach. For example, in 2022, Carvana acquired ADESA, the nation’s second-largest wholesale auto auction chain, for $2,200 million to increase its real estate footprint. In 2023, the company entered into a partnership with NRG to launch a Rocket League esports event.
As of December 31, 2022, Carvana has established a logistics network and local marketing presence in 316 metropolitan cities and has purchased, reconditioned, sold, and delivered over 1.4 million vehicles since the launch of its first market in January 2013. As of December 31, 2022, its 316 markets serviced 81.1% of the U.S. population compared to its 311 markets as of December 31, 2021, which serviced 81.0% of the U.S. population. The company utilises a combination of brand building as well as direct response channels to seed and scale the local markets efficiently.
The U.S. used car marketplace is highly fragmented. The largest dealer brand commands approximately 2.3% of the U.S. market, and the top 100 used car retailers collectively hold approximately 11.1% of the market share, according to Automotive News. Carvana believes the primary competitive factors in this market include transparency, convenience, price, selection, and vehicle quality. Carvana faces significant competition from companies that provide listings, information, lead generation, and car-buying and selling services designed to reach businesses and consumers and enable dealers to reach these consumers and inventory sources.
The current and future competitors include traditional used vehicle dealerships such as CarMax that could increase investment in technology and infrastructure to compete directly with the online model; internet and online automotive sites that could change their models to directly compete with Carvana, such as Amazon; Autobytel.com, AutoTrader.com, Cars.com, CarGurus.com, eBay Motors, Edmunds.com, Google, KBB.com, and TrueCar.com; providers of offline, membership-based car-buying services such as the Costco Auto Program; used vehicle dealers or marketplaces with e-commerce business or online platforms such as Shift, Fair, and Vroom; automobile manufacturers such as Ford, General Motors, Hyundai, and Volkswagen that could change their sales models through technology and infrastructure investments; and automobile manufacturers such as Tesla that market directly to consumers.
Company History
Carvana Co is an online platform for buying and selling used cars. It was founded in 2012 by Ernest Garcia III, Ryan Keeton, and Ben Huston, who wanted to create a better customer experience for car buyers. The company started as a traditional used car dealership in Phoenix, Arizona, but soon launched its online platform and its signature car vending machines. Carvana went public in 2017 and has since expanded to over 280 markets in the US. The company has also acquired several competitors and technologies to enhance its data and analytics capabilities. Carvana’s revenue and market value have grown rapidly, especially during the COVID-19 pandemic, as more customers turned to online car shopping.
In 2012, Carvana was founded by Ernest Garcia III, Ryan Keeton, and Ben Huston, with initial funding from DriveTime, a used car retailer and finance company. In 2013, Carvana launched its online platform, allowing customers to browse and purchase used cars entirely online, with features such as 360-degree virtual tours, a seven-day money-back guarantee, and free delivery or pick-up options. In 2014, Carvana received a $5 million investment from Drive Capital, a venture capital firm focused on Midwest startups. In 2015, Carvana opened its first car vending machine in Nashville, Tennessee, a fully automated, coin-operated tower that dispenses cars to customers who have purchased them online. The company also secured an additional $160 million in funding from investors, including Ally Financial, a leading digital financial services company. In 2017, Carvana went public, raising $225 million in its initial public offering on the New York Stock Exchange under the symbol CVNA. The company also acquired Carlypso, a rival automotive startup that provides vehicle data and analytical tools.
In 2018, Carvana acquired Car360, a startup that uses smartphone technology to take 3D photos of vehicles with computer vision, machine learning, and augmented reality. The company also receives a $2,000 million line of credit from Ally Financial to finance its inventory and operations. In 2019, Carvana became the fastest-growing online used car dealer in the US, selling over 177,000 vehicles and generating over $3,900 million in revenue. The company also expanded its car vending machine network to over 20 locations across the country.
In 2020, Carvana introduced touchless delivery and pick-up options in response to the COVID-19 pandemic, which boosted its sales and market value. The company sells over 244,000 vehicles and posts over $5,500 million in revenue, making it the second-largest online used car retailer in the US. The company also acquired ADESA, the nation’s second-largest wholesale auto auction chain, for $2,200 million.
In 2021, Carvana continued to grow its market share and customer base, reaching over 300 markets in the US and offering as-soon-as-next-day delivery. The company also joins the Fortune 500 list, one of the youngest companies to do so. Carvana’s market capitalisation surpasses $60,000 million, making it one of the most valuable e-commerce companies in the world. In 2022, Carvana completed the acquisition of 100% of the equity interests in the U.S. physical auction business of ADESA U.S. Auction, LLC ("ADESA") from KAR Auction Services, Inc. ("KAR") for approximately $2,200 million in cash (the "ADESA Acquisition")1. The acquisition included 56 auction sites throughout the U.S. with 6.5 million square feet of buildings on more than 4,000 acres of land, significantly expanding the infrastructure and enhancing the customer offering by facilitating a broader selection of vehicles and faster delivery times1. In 2023, Carvana achieved record results for total gross profit per unit (GPU), net income, and adjusted EBITDA. It reported a net income of $741 million, adjusted EBITDA of $148 million, and GPU of $5,952. In 2023, Carvana announced that it expects to complete an estimated $1,000 million in annual cost reduction and improve its customer experiences. It also expects to achieve positive free cash flow in 2023. On March 29, 2023, Carvana opened its first vending machine in New York on Long Island near Garden City, bringing the national total in operation to 35 at the quarter's end.
