Carvana: Ramping
The sell-side is badly mismodeling growth and operating leverage.
Carvana reported its third-quarter results on November 2nd. This was another strong quarter of Step 2 progress. For those unfamiliar with Carvana, Step 2 is part of management’s three step plan to fix the company’s financials and return it to growth.
Step 1, completed in the second quarter of last year, returned the business to positive adjusted EBITDA.
Step 2 is focused on achieving efficiencies to maximize the unit economics aka adjusted EBITDA per unit while managing retail volume to a more or less flat level.
Step 3 will be about returning to volume growth.
I’ll get straight to the point here: despite being an 11-bagger last year—and the single best performing stock in the entire world—CVNA is still a phenomenal investment. This is an incredibly compelling long-term story, which I have covered previously, but in this post I’m actually going to cover why this is super attractive short-term story. I almost never have a specific short-term view of my holdings or rely on catalysts, but between the fundamental changes going on, the still widespread investor skepticism, and the sell-side’s mismodeling of growth and operating leverage, it seems like seven moons are aligning here.
The Short-Term Story
Over the last 18 months, Carvana had to shrink in order to get lean and efficient. That meant doing multiple rounds of layoffs to bring headcount in line with a lower but stable level of retail unit volume. It meant cutting both inventory and advertising by over 50%. When Carvana cuts advertising, naturally site and app traffic declines. And when it cuts inventory, it becomes even less likely that the traffic that does visit finds the car they are looking for. Not surprisingly, retail units declined 24% last year. That self-inflicted harm to sales was necessary so management could fix the cost structure.
The opposite will be true when the business returns to growth. It will hire more logistics and delivery personnel, which will enable faster delivery times, including same-day delivery. Faster delivery times increase sales conversion. It will also increase inventory, which means customers are more likely to find the car they want. That increases sales conversion, which means customer acquisition costs fall, which means the business can increase advertising to bring in more top of the funnel traffic. More traffic that is converting higher will enable continued growth of inventory, which increases sales conversion, drops CAC, enables more advertising, and the positive cycle runs higher still. In contrast, this will be a self-inflicted benefit to sales.
So one big question has been “When is Step 3 going to start?” The company has been in Step 2 since last April. Management’s most recent public comments indicate they are still in Step 2, but very recent evidence suggests Step 3 may be starting right now.
There have been several posts on LinkedIn by Carvana HR advertising jobs and hiring events. Here are some of them:
Consistent with that, job listings on carvana.com have increased materially. Tracking them each day shows that they increase and then fall as they get filled and that cycle repeats.
The alt data from Alternative Alpha also shows a few things. First, average advertised delivery times have come down in recent weeks. In November and December, the average advertised delivery times were 6.3 days. In the last 10 days, it has averaged 5.3 days and has touched high 4s some days. This is consistent with the improving delivery speeds, including the continuous rollout of same-day delivery in more markets as you can see from these press releases.
Feb 07, 2024 Carvana Brings Same Day Vehicle Delivery to Oklahoma City
Jan 31, 2024 Carvana Accelerates Car Buying with Same-Day Delivery in San Antonio
Jan 24, 2024 Carvana Raises the Bar in Online Auto Retail with Same Day Delivery Expansion to Birmingham
Dec 11, 2023 Carvana Launches Same Day Vehicle Delivery Offering to Columbus and Cincinnati Area Residents
Nov 29, 2023 Carvana Expands Same Day Delivery Offering to Central Florida Residents
Nov 16, 2023 Carvana Expands Same Day Delivery Offering to Dallas-Fort Worth Area Customers
Nov 13, 2023 Carvana Debuts Same Day Vehicle Delivery In Greater Atlanta Area
My view is that hiring more delivery drivers and improving delivery speeds may have…