Industry Trends

Is Carvana a Giant Canary?


The automotive retail industry looks at Carvana with a mix of sheer awe and total distrust. We admire them for their marketing savvy as they continue to push messaging of simplicity, convenience, and speed. Of course we sneer a bit at the amazingly poor profitably and then remain confused at the huge rise in stock price. Until recently, that is.

Page two of the news also tells a completely different story, littered with tales of nightmare scenarios for customers. That’s right folks; auto retail is not easy! We breathe a deep, satisfied breath and feel great knowing that franchise dealers at least know how to register cars with the DMV. Heckuva story here in TradePending’s home state of North Carolina.

Here we are in late April 2022, and just when the Adesa acquisition discussions tailed off a bit, whammo! The Wall Street Journal’s recent article, “Carvana Has First Big Loss on Sales Decline”, again has the naysayers in automotive clamoring for their demise as they watch the company’s share price tumble. 

The article sums up Carvana’s challenges:

  • Sold ~7,800 fewer cars this quarter vs. last quarter
  • Net loss grew to $260 million, compared to $36 million the year prior.
  • Gross profit per unit fell from $3,656 a year earlier to $2,833 in Q1 2022, a 22.5% decline.
  • Increasing interest rates, inflation, and decreasing used car prices are cutting into consumer demand.

But wait, there’s more!  A $3.275 Billion junk bond raise by Carvana gets consumed by Apollo. With so much news to follow, maybe Carvana’s play here is “any press is good press”.

Within these challenges, one of the more surprising bullets to us at TradePending is the gross per unit being so far down. The overall decline in available used car inventory explains the lower volume, but typically lower supply increases prices and therefore margins. 

A reasonable hypothesis to explain the decline in gross per unit is that Carvana paid more to acquire those cars with an expectation that they would sell at a certain price. Those cars were still in inventory when the market peaked, requiring them to sell those cars at a new, lower than anticipated value, cutting their gross profit per unit and their margins.

If rates continue to increase, consumer demand will drop, while margins will continue to come down as expenses go up. If the banks tighten the screws on lending, our inventory shortage will come to an abrupt end. Should the banks start to repossess the cars that consumers are buried in and can longer afford, we’ll see even bigger challenges. 

The reality: the issues Carvana is facing are not theirs alone. Carvana is a microcosm of the broader market, or a giant canary in the automotive retail industry’s coal mine.

The lean times, if they do come, will affect all dealerships. Let’s hope they’ve been saving the record profits they’ve been making the past two years, and that they’ve been investing in the technology and tools to ensure they acquire and merchandise the right inventory at the right price.