This Is Why Investors Hate Carvana

One of the best pieces of financial advice I’ve heard is to never pick your own stocks. That hot tip could be old information or a pump-and-dump. Real experts are working around the clock to ensure your portfolio will perform over the long term. Leave them to it.

How many day traders do you think are reading up on Carvana right now? The former DriveTime subsidiary made news in April when it stormed into the rankings of America’s top 10 used-vehicle retailers after more than doubling its 2017 sales to 94,108 last year.

So there’s one more reason for dealers to hate Carvana, with their halo-topped logo and “That didn’t suck!” tagline, perpetuating the narrative that visiting a dealership can only result in emotional distress and financial ruin. But investors might hate Carvana even more.

A Seeking Alpha search reveals such alarming headlines as “Smoke and Mirrors,” “Unworkable Business Model,” and “What You See Is Not What You Get.” Those analysts don’t believe the six-year-old company will ever turn a profit. They believe Carvana’s below-market prices are a sign their finance sources are willing to take Carvana’s bad-credit customers but don’t want to overextend on loan-to-value. You can’t make money that way. They also dislike the fact that Carvana customers never visit a dealership. They understand that price sensitivity diminishes when you’re in the presence of a vehicle and a salesperson.

The proof is in the numbers. CarMax is still the nation’s No. 1 used-car retailer after selling 721,512 units in 2018. In the fourth quarter, they sold 196,880, and they profited to the tune of $1,451 per unit: $3,755 in gross profit minus $2,304 in expenses. In the same quarter, Carvana moved 27,750 units. They earned $2,131 GPU and spent $4,776 for the privilege, a net loss of $2,645.

Carvana CEO Ernest Garcia III knows this as well as anyone, and he wouldn’t claim the company can go on losing money — about $255 million over the last year — and expect to survive. But that’s OK, because his stated goal is to sell 2 million units a year, and all he has to do is (a) corner 31% of the U.S. used-car market and (b) get used-car buyers to trade up every three years.

That’s a problem, because (a) CarMax only owns about 2% and (b) used-car buyers currently average more than six years between purchases.

How does Garcia expect to turn the tide? Magic!

“If it wasn’t such a pain, they’d do it faster, and the industry would grow,” Garcia said, referring of course to the traditional dealership model. In February, he told Entrepreneur that Carvana enjoyed “better economics” thanks to its online model and centralized operations. “Once you have better economics, you can also build a culture of delivering great experiences to your customers on top of that, and that is exactly what we seek to do every day.”

It’s still possible Carvana stock pays off in the long run. We’ll let the experts decide.