May 04, 2017 - 9:16pm EST by
2017 2018
Price: 10.00 EPS 0 0
Shares Out. (in M): 137 P/E 0 0
Market Cap (in $M): 1,370 P/FCF 0 0
Net Debt (in $M): -50 EBIT 0 0
TEV (in $M): 1,320 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Carvana is a leading eCommerce platform for buying used cars. The business has explosive growth, but I believe operating losses and significant working capital requirements will quickly overwhelm a weak balance sheet (~$210M of cash) and the Company could go bankrupt or be forced to issue lots of dilutive equity. The short thesis here is relatively straight forward and I look forward to hearing what others think about the following observations regarding this lemon.

1. Carvana is growing sales rapidly with Q1 2017 revenue guided up 117%, but they operate on very thin gross profit margins - ~$1,100 per car. Gross profit per car has been roughly flat since Q1 16, despite significantly higher sales.

2. They actually earn almost no gross profit on the cars, but generate the majority of the gross profit from service contracts and loans sold to a related party, DriveTime, controlled by the CEO. These “other gross profits” were sold to third parties prior to December 9, 2016 (a few months before the IPO) but they started selling them to themselves through a Master Dealer Agreement that was “not negotiated at arms length.” I have no evidence of fraud, but this change is highly fishy.    

3. Assuming the gross profit is real, they spend ~$5,800 in SG&A to generate $1,100 of gross profit per car, leading to $(4,700) of EBIT lost per car sold. They lose money on every car but are trying to make it up on volume.

4. SG&A as a % of sales has been flat at ~30% in 2015, 2016 and Q1 2017. They present misleading cohort analysis showing that advertising as a % of sales is lower in older markets, but this is misleading as advertising is only 7% of sales. Even if advertising was zero, they would still lose money on every sale.

5. Used care prices is declining. With already this margins and too much SG&A per car, this deflation creates a tough headwind.

6. This is not a software company. It is a highly capital intensive car dealer. Inventory build consumed $117M of cash in 2016 with inventory being ~50% of sales.

7. So here is my cash bridge. 210M of cash to start. Less 155M of operating losses (Q1 17 *4) = 55M of cash. Assuming sales double, requires $185M of inventory and they spend ~$40M on capex =  negative $170M. Said another way, CFO less capex was ($280M) in 2016 and getting worse as working capital need grow.

I think they will run out of money in a few quarters.    

8. The company has a dual class voting structure, so shareholders have no voice in governance and the 34 year old CEO is in charge


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Running out of cash

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