Not all that long ago, it seemed that Carvana was unstoppable. When you see Carvana, you've got nirvana. That's what this market's about, is finding the next Carvana! Carvana benefiting from the strong used car market. In its most recent quarter, total gross profit was up 145%. But as with many onetime Wall Street darlings, the excitement around the online used vehicle retailer did not last long. This one is just a total house of pain! House of pain! Shares of Carvana plunging for a second day, dropping to its lowest price on record. When the pandemic hit, all of the dealerships shut down in many states and no one really knew what was going to happen. Everyone viewed Carvana as this stock that was going to skyrocket and, to a certain extent, it did. In August 2021, the stock hit $370 and Carvana was on top of the world. Since that peak, I mean, Carvana has just collapsed and for investors it has been anything but nirvana for the Carvana stock. Carvana began as a subsidiary of DriveTime Automotive Group, a traditional used car dealership owned by Carvana CEO Ernie Garcia III's father. Garcia began working at his father's company shortly after graduating from Stanford in 2005. Seeing firsthand some of the pain points of the traditional car buying experience, Garcia, along with two other founders, decided to spin Carvana off into a separate business in 2012. In March of 2013, the company launched in its first market, Atlanta. Here's Garcia talking about the company's early days last year. You know, when we started Carvana, the goal was how do we use modern technology and build a different kind of business that gives customers the simple experiences they're looking for with low prices and great selection. If you go to Carvana, you're going to see tens of thousands of cars versus if you go to a dealership, you might see 50 or 100 cars. So next you're going to see a price that is about $1,000 less when you take into account dock fees and everything else than you would likely pay at a dealership. In addition to finding, touring and buying a used car completely online, Carvana gives customers the option to get financing and sign up for additional warranties with the click of a button. Customers then get the option of having their newly purchased car delivered to them, or picking it up from one of the company's 33 fully-automated car vending machines. If they're not happy with their purchase, customers can return their vehicles within seven days and get their money back. Users can also sell or trade in their own vehicles, which they can leave at one of Carvana's vending machines or get picked up directly from their homes. But the convenience for the customer comes at the price of making operations more complicated for Carvana. Once you sell a car to them, they have to then flip that car. They've got to make it sellable. They have to go through inspections. They have to do the recalls, if there are any recalls. And there's a lot more to the process than people think. And it can be extremely costly. When you think about the logistics of, let's say, going to pick up a car in Maine and selling it to someone in California. On April 28th, 2017, Carvana became a public company. The event was somewhat lackluster, with Carvana stock tanking 14% at the end of its first day of trading. When Carvana went public, there was a lot of hype around the company. It actually kind of reminded me a lot of the EV startups that we saw in recent years where they were going to come in and just tear apart the entire new vehicle used vehicle franchise system or the auto industry. But what we saw was it took a little bit more than some people thought to kind of break into the used car market. Still, Carvana did seem to eventually find its footing. Over the last few years, the company has been steadily climbing the list of top used car retailers. The ranking is put together by trade publication Automotive News and tracks companies by volume of vehicles sold every year. In 2018, Carvana entered the top ten list for the first time, having sold over 94,000 vehicles. Since 2019, Carvana has quickly moved up the ranks, with the latest data showing that Carvana sold over 425,000 vehicles in 2021, giving the company its number two spot after used car behemoth, CarMax. Last year, Carvana hit another milestone, becoming one of the youngest companies to make the Fortune 500 list just nine years after it was founded. Such a feat has only been achieved by the likes of Google and Amazon, both of which made the list eight years after they were founded. By late summer 2021, Carvana CEO was in a celebratory mood after the company hit its first profitable quarter. If you don't mind, I want to take a moment to take a victory lap and say this is our first positive quarter and to thank all the people of Carvana that have worked so hard over the last eight years to make that possible. Eight years ago, we launched, we sold a couple of hundred cars and this quarter we sold over 100,000 cars. And this year we'll sell 1,000 times as many cars as we sold that first year. By January 2022, Carvana celebrated selling its millionth car. Experts attribute Carvana's success to a perfect storm of factors that acted in its favor early on in the Covid 19 pandemic. Supply chain problems choked the production of new vehicles, social distancing measures made Carvana's online only car buying experience desirable, government stimulus programs gave customers extra cash to spend and rock bottom interest rates encouraged them to do just that. But the same sky-high demand that made Carvana a Wall Street star would also bring it down. What ended up happening was the demand was too great for the company. It couldn't even keep up with the demand of vehicles that were coming into the company to then go out and sell. It was buying a record amount of vehicles heading into this year and they were at record high prices because that's just where the industry was. So Carvana built up its inventory at the peak of the pricing, not expecting that demand to fall. In an effort to get more inventory, accelerate the inspection and processing of its used vehicles and expand its footprint, Carvana purchased Adesa's U.S. auction business earlier this year. The $2.2 billion all-cash deal gave Carvana a number of new employees and 56 physical locations that the company could use to recondition its cars before sending them off to customers. But it also saddled Carvana with a ton of debt. And many saw the acquisition as ill-timed. For Carvana buying Adesa in 2022 at the same time that their stock price was going down, maybe their sales were slowing was probably not the best idea at this particular point in time. In a December note to investors, Wedbush analysts went as far as to say that Adesa was, 'an albatross' around Carvana's neck. But Carvana co-founder Ryan Keaton says there are no regrets. In terms of our long term outlook and where we want to be for the business, the Adesa acquisition was was a great one for us. It helps when we buy cars from customers. We're able to transport that to now these Adesa locations, where in the past, we had to take them a little bit further or in the past we would have to spend money to a third party to be able to do that. It also enables consumers to get the car much more quickly. Even before the Adesa acquisition, Carvana's troubles were beginning to mount. There's been issues with state regulators over the years for things like failing to deliver titles to the MVA and selling cars without state inspections. How is Carvana addressing these problems and are you beyond it at this point? We're working really closely with all the relevant parties to to answer the questions and to remedy any kind of concerns that that may exist. Sure, there are always going to be things that kind of happen, whether like a title registration is late or whatever else there too. I think we're not perfect. And and I think the industry is not perfect, but it's just what we're trying to do is and certainly improve there. Then there is falling demand. Data from Cox Automotive shows that total used vehicle sales fell to about 2.8 million cars in October 2022, down about 15% from the same time last year. Used car prices are also starting to normalize after an explosive growth in 2021. They overbuilt for demand that never came and that was following not being prepared enough for the demand that was there. So they really missed their chance of, I mean, capitalizing on the coronavirus pandemic. All these factors came to a head in Carvana's Q3 2022 earnings report, which showed almost every aspect of the car resellers business declining. It's less affordable for people to buy a used car right now, whether that's the high prices which remain elevated, even though they've come down a little bit, then the higher interest rates. But the real issue for Carvana, the debt load and whether or not this is a company that A, can get back to profitability and then B, has a runway to pay off the debt. On November 30th, Bank of America downgraded Carvana to neutral, saying that without a cash infusion, Carvana is likely to run out of cash by 2023. By early December, Carvana stock plummeted by about 97% from its all time intraday high of $376.83 per share on August 10, 2021. The company's market cap was also down from $60 billion during its peak last year to about $723 million. Still, some analysts do believe that there is a way forward for Carvana. In a December note to investors, Morgan Stanley said, 'we remain believers in the potential for Carvana to revolutionize the dealer business model and believe it has the best digitally enabled proverbial mousetrap in the business.' To do this, the note went on to say, Carvana would need a significant injection of capital. The note came after Morgan Stanley pulled its rating of Carvana in early November. But getting this new injection of capital may be tough. I think it's possible for Carvana to recover, but I think that they will have to perhaps scale back some of their growth aspirations. One of the things, you know, traditionally with startup companies that has fueled their market valuations is their potential for growth. And for a company like Carvana, there isn't really that opportunity for unlimited growth. Just this year, Carvana announced two rounds of layoffs. We're shifting to be kind of more efficient and we're making really good progress there. And ultimately, you know, we have a plan that we're working with a singular mindset to try to like really kind of get to profitability as quickly as possible, to reduce our expenses and get to EBITDA positive. At Q3, we had $2 billion of committed liquidity resources and also an additional $2 billion of other liquidity resources. So we have plenty of liquidity to go to execute that plan. Carvana is also increasingly facing greater competition. Aside from online used car retailers like Vroom and Shift, more mainstream players were also forced to enter the market during the pandemic. Autonation hopped into this realm quite heavily. You've got Lithia that's in this realm and you've got traditional franchised dealers that were forced to change and sell vehicles online, and they have an advantage of having a traditional brick and mortar that's local to customers that can attract vehicles coming into them. So I mean, Carvana's model went from this unique ground breaking plan to disrupt the industry, which they did. But the industry caught up a lot quicker than I think they thought. Even Ford has said it plans to sell all of its future EVs online. CEO, Jim Farley, explained the reasoning for this decision at an investor conference earlier this year, saying that Ford's current advertising and distribution costs per car were about $2,000 more than Tesla's, which sells its cars directly to consumers. But Keaton says there's room for everyone. Automotive retail is a is a very unique industry. It's so, so highly fragmented. I think the market leader has something like a 2% to 3% market share of that whole industry. It's very different than saying like, hey, it's $100 million industry, of which the two leading companies have like a 60% market share where you're really battling it out. Among rising interest rates, fears of a recession and a supply chain that's allowing the production of more new vehicles, the future of used car retailers like Carvana seems precarious. But Keaton says, the key for the company right now is to remain laser focused. Where do you see Carvana in five years? In all honesty, I think we're focusing kind of like what's in front of us right now. It's nice to be able to to think about, but I think it's just a distraction from from what we need to do right now and our mission moving forward.