Ernie Garcia insisted for years that 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 looked like another tech bro whose operational skills failed to match his courage.
Carvana's stock price has fallen to $4 from $360 at its peak. Wall Street's largest vulture funds were hunkering down in anticipation of a possible bankruptcy. High interest rates have worsened the affordability of used cars.
The company that had enticed investors as a digital revolutionary, distributing vehicles from illuminated glass towers, was instead at risk of becoming another victim of a low interest rate environment that rewarded revenue growth at all costs.
Garcia vowed to spin at high speed. His company will cut costs, and its big ambitions for growth will take a backseat to proving efficiency. Remarkably, Carvana avoided the looming financial cliff.
In 2023, Carvana achieved its highest-ever gross profit per car ever sold, as well as a record, albeit modest, operating profit of $300 million. These results came even as fewer cars were sold – 300,000 compared to about 425,000 cars in 2021.
Reaching an agreement with bondholders has given the company some financial breathing room. Carvana stock rose to $86, including a nearly 10 percent jump on Wednesday. Critics on social media have mostly remained silent.
Carvana remains the most shorted stock in the auto retail sector, with a third of its stake borrowed and sold. But bets against Garcia's moves proved painful. Short sellers have suffered losses of more than $3 billion in the past 15 months, according to calculations by research firm S3 Partners.
“Pressure makes you better,” Garcia, 41, said in an interview. “Stress forces you to prioritize and forces you to address things you might not have otherwise addressed.”
Carvana was formed as an online offshoot of the traditional used car retail chain called DriveTime, which was founded by Garcia's father and is based in Phoenix, Arizona.
The younger Garcia noted that Carvana faced a lot of skeptics after going public in 2017.
Garcia noted comments he heard at the time included: “They're outside of Phoenix, they're very capital intensive, they can't raise money, and no one will fund a company that has a supply chain and financing.” [lending] an item.”
“That was a stage where I don't think we were seen as having bright prospects,” he added.
Garcia said the company slowly began gaining credibility in late 2010. Then the pandemic took the company to another level, as the collapse of global supply chains led to a shortage of new cars that in turn led to increased demand for used cars. Carvana's sales volumes 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 have also risen, causing Carvana's cost of goods sold to rise 13 percent in 2022, twice the pace of revenue growth. High sticker prices have also deterred consumers, while the Federal Reserve's crackdown on inflation through high interest rates has made monthly car payments unaffordable for some.
Even with record sales in 2021, Carvana did not achieve positive free cash flow or net income. In late 2022, Garcia told Wall Street that the company's sole focus would be “unit economics,” where profits from each vehicle sale are high enough that Carvana will no longer rely on outside financing to stay afloat.
In the fourth quarter of 2023, Carvana's widely cited “gross profit per unit” was $6,000, double from the lows of 2022. The company cut overhead costs by about a third last year from a peak of $2.5 billion In 2022. It dropped to 14,000.
“The pace at which we reduced fixed and variable costs. . . “We are very proud of the speed of this progress,” Garcia said.
Carvana, whose business has historically relied heavily on originating and then selling auto loans, has also benefited from a strong American consumer and stable interest rates.
Wall Street analysts have been impressed that the company's market value has returned to $16 billion, but now question whether the company can quickly increase unit sales while keeping spending under control.
“Carvana needs to grow significantly to justify its valuation,” wrote analysts at Wedbush Securities, who simultaneously praised the “remarkable improvements in operations.”
Jared Rose, a Canadian investor at Gravity Partners Capital Management and a longtime Carvana owner, said Carvana's value was “assessed based on a number of sales like a technology company, as opposed to book value or earnings like a lender and an auto retailer.”
The elder Garcia came to the attention of Carvana shareholders when selling several billion dollars of the company's stock during the run-up to 2021. As part of a 2023 balance sheet restructuring as creditors reduced their principal amounts, the Garcia family agreed to purchase more than $100 million in stock. The new one is priced at $46 per share, an investment that has proven profitable.
With a total debt balance of more than $7 billion, the company will need to make continued progress. Carvana's bondholders, including the likes of Apollo Global Management, agreed in a restructuring last year to allow the company to defer cash interest payments until 2025, saving the company more than $400 million annually.
Garcia repeatedly pointed out that the U.S. used car market was flat at about 40 million cars sold annually, and that Carvana, even at its peak sales volume, had only 1 percent of that. If the company can master executing the used car buying process and then matching it with buyers across the country via smartphones, the opportunity is still huge.
The lesson from Carvana's wild swings over the past decade is to stay focused on core goals and be accountable for achieving them, Garcia said.
“The mistake of smart and ambitious people is to overcomplicate and take on too much,” he said.
