3 Lessons From The Carvana Crash

3 Lessons From The Carvana Crash
Theodora Lee Joseph, CFA

over 1 year ago2 mins

Mentioned in story

It’s not every day you see a stock darling crash 97% in less than a year, or see one plummet 39% in a single day. So when that happens, you want to sit up and pay attention.

Yes, I’m talking about Carvana (ticker: CVNA), the US-based online used-car dealership that fancies itself as the amazon.com of used cars. The company makes it super easy for people to buy secondhand vehicles – you can have a car delivered to your driveway, or you can buy one through a car “vending machine”. And the company has seen pretty good results: in fact, it saw almost linear growth from 2019 (chart on left) with share prices peaking at $361 in late 2021 (it’s now about $7. The trouble came when it reported a decline of 8% in retail car volumes in the last quarter, spooking investors who’ve only ever known its revenues to go up. Net losses also widened to more than $500 million in the quarter (chart on right).

Look, things have changed. We used to be in a low interest rate environment, where growth was cheap and easy, and investors were happy to own high-growth stocks even if they weren’t generating profits or cash. But we’re now in a vastly different climate and there are some lessons to learn from Carvana’s example:

Firstly, beware of companies that saw strong price appreciation driven purely by sales growth, without cash to back that growth. A rising market can mask bad companies – if in doubt, look for cash.

Secondly, look for companies that do just what they say. Carvana branded itself as a digital disruptor in the used car market, but in reality, its loans business was generating more than half the gross profit per unit – a model that worked well when rates were low.

Lastly, watch out for companies with high operational leverage. They’ve got high fixed costs, which means their profit gets crushed when growth slows even just a little – a very present risk in today’s climate.

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