$CVNA and the death of $VRM
It’s been rather slow lately on the news front despite the rather high volatility in stock prices. It seems like the market has collectively held their breath as we relentlessly debate where rates go in the near, medium, and long term. Given the default assumption for nearly a decade was simply “rates will be flat or lower” it’s curious how now it’s a topic of such contention. I mention this not in an effort to sound smart relative to other finance professionals, but actually because the topic has flourished throughout the public consciousness. Advertisers discussing rates when budgeting, consumers discussing rates when taking out loans, it’s fascinating.
None of that is really particularly impactful in the sense that you can do anything about it, but it is interesting to note how social media becoming endemic has made business professionals paranoia quite correlated. The end result is that perhaps financial markets are not being irrational, perhaps they are simply a rational expression of an irrational phenomena?
Anyways, I am not Ray Dalio so you aren’t here for my macro news letter.
VRM’s Last Vroom
As a result of perhaps the aforementioned macro shakiness or simply a deteriorating balance sheet from hell, Vroom, ticker VRM, has announced they are ceasing all used car operations and essentially shuttering the business. For those unaware, Vroom was perhaps the 2nd largest online only used car dealer behind Carvana, getting somewhat close to 100k units per year during the pandemic before announcing last year that the business model was unsustainable and had to change, leading to a significant downsizing in unit sales as they focused on higher cost and higher margin vehicles. Sales dwindled to a paltry ~60 cars per day on average, nearly 1/20th the size of CVNA.
Thus the announcement they were ceasing business was by no means a surprise, simply a confirmation. I like to reflect on events such as this as failures tend to be the best teachers. What made VRM die and CVNA live? Will there be another VRM? Somewhat important questions given basically all of the value in CVNA is the terminal value.
As a spoiler, I do not believe it is possible to build another CVNA. Hopefully the reasons I give are somewhat compelling, and if not feel free to comment why!
Reason 1 - Logistics and reconditioning is very expensive:
This is somewhat obvious, but the scale is rather baffling. CVNA has spent tens of billions of dollars building out their logistics and reconditioning footprint. This is not something that I believe will ever again be replicated via external funding. The cost of capital now is drastically higher (to the point of nearly causing CVNA’s insolvency). For another VRM to come along and get to CVNA’s scale would likely require many billions of dollars in capital to simply get moving, as well as billions of dollars in inventory value, financing, etc. The 2010’s through 2021 were uniquely set up to enable these kinds of businesses to thrive, for rather obvious reasons due to interest rates.
Even incumbents such as KMX or LAD would take years to self fund competing products. The best they can hope for is something “good enough” and praying a physical presence is a good differentiator. A similar model to CVNA’s IRC’s they’d almost have to start from scratch which is obscenely prohibitive. In short I doubt it happens and now with the finality of VRM’s death, it seems nobody new will be joining CVNA.
Reason 2 - Financing is very very hard:
Vroom spent years trying to do inhouse financing and just as they started to get close their business failed. It turns out funding car loans is pretty difficult! Some quick math is ~$25,000 ASP at CVNA, ~80k cars sold, ~80% finance attach rate, 100% LTV. That means 64,000 vehicles being financed at $25,000 each. Not everyone has $1.6b lying around that they then need to turn around and sell. Finding buyers for $1.6b of loans each quarter is also quite difficult, especially when your margin is based upon buyers opinions of the strength of your loans. For a new business launch to get to a similar scale to CVNA in financing would take at a minimum 3-5 years or more to build up trust and prior lending cohort data. Prior to that they would face a structural disadvantage for financing income while also being required to burn $ on CapEx. So you’d be spending more and earning less with much higher interest rates, a tough sell to get investor funded.
Many incumbents already have in-housed lending such as KMX that performs quite well, but even there CVNA cleanly outperforms specifically on the subprime side which KMX will note is a multi-year process for them to get involved in. Even for KMX they don’t have a similar level of capital recycling capabilities since they were under the impression they were in a stagnant industry where they could slowly win in market share and squeeze margins higher, not an industry where they could take rapid share by recycling capital. This means CVNA has a distinct structural advantage over the next few years to grow significantly faster than existing incumbents due to faster capital recycling at better terms.
CVNA’s work in setting up their financing arm and it living through the 2020-2023 stress test is phenomenal and a distinct core advantage that new and old players will struggle to replicate.
Reason 3: Technology, especially with hard assets, is hard:
Generally it seems to be popular opinion that UI and other such things are not a “moat”. With many software companies I would agree, but when it comes to interacting with real world assets and financial institutions, it can definetly be meaningful. A simple exercise is to purchase a vehicle on CVNA and compare it to competing websites. Behind the scenes CVNA has a very fleshed out RFID vehicle tracking system, connections to vehicle history reports, public consumer data to improve credit profiles, document signing services, title transfer services, etc. CVNA can effectively complete a transaction within 15-30 minutes whereas a VRM sample purchase could take >1hr due to slower financing approval, more info requirements for credit purposes, more touches from service reps, etc. Even KMX while having streamlined their web service over the past few years still has a meaningful difference in their rep time spent per sale.
This difference is again the result of years of spend and effort on behalf of CVNA. You may remember them popping up for title issues over the past few years. In many cases this wasn’t actually their fault, it’s just selling vehicles across state lines digitally was very poorly supported by some DMV’s. CVNA’s effort has made this easier for everybody, but they have far more experience in navigating this area which can save 1-2 weeks of depreciation on each vehicle sold, which can equate to hundreds of dollars per sale, again creating a structural cost or margin advantage.
Incumbents and new entrants would need to replicate the full technology stack across a much lower unit scale or face a competitive disadvantage. A tough ask given the skillset of incumbent car dealers and capital levels of potential new entrants.
Reason 4: Marketing for e-commerce is brand first
The logic I’m about to outline is relatively simple and also why I own $AMZN.
If you see an item on Amazon.com and the same item on Joebobshop.com but 5% cheaper, where are you going to buy it from? The expressed consumer preference is almost always going to be Amazon.com, as it is a known brand, with known easy return processes, with probably easier checkout, and definetly not a scam (or your money back). VRM was basically the Joebobshop.com in this scenario and simply could not generate demand without spending heavily on advertising.
The same logic (I believe) applies across all of e-commerce. CVNA has essentially cemented themselves as THE online car shopping platform due to their eye watering brand ad spending over the past 5 years or so. There’s a twitter account I forget the name of that does consumer surveys and despite not being the biggest, CVNA has some obscene mind share for e-commerce of vehicles. It is very very tough to replicate this as one would need to spend copious amounts of money on brand advertising, which again is very difficult when you are already facing numerous other structural disadvantages in cost. A new market entrant doesn’t have a lot to play with when capital isn’t effectively free.
Incumbents do have an advantage in that physical presences make it much easier to gather mind share as you are forced to view them driving down the highway. CVNA has their vending machines and such due to a similar thought process. The issue is again how well can you translate this to winning e-commerce mind share? With traditional retail it seems like only Walmart has really broken out on their own from AMZN and even that is a bit tenuous. Many others simply went bankrupt. The environment makes it easier to do a digital transition than it was 10 years ago, but the underlying disadvantages in skill set likely still exist. Additionally the market is simply so fragmented that CVNA doesn’t even need to stomp out KMX or LAD, they just need to beat a local mom and pop that has basically no hope of competing.
Summary:
All in all, the likes of VRM and others are somewhat doomed to fail if they compete with CVNA due to a multitude of reasons. While this alone doesn’t guarantee CVNA will be an excellent stock (still requires execution and a healthy TAM), it is a significant boon now that existential debt risk is largely mitigated. It’s possible the likes of LAD or KMX can compete more rigorously with CVNA in the future, but a tough last few years has not been conducive to investing in the needed spaces as stocks that trade on EPS with management comp mostly dependent on EPS with negative environmental EPS pressure. KMX has pumped the brakes if anything on their push into subprime and LAD is still only beginning their e-comm journey.
I continue to be very very long CVNA and it is I believe my top position currently. Recent data from
has been very very positive and indicates the near term numbers look quite good in terms of units and ASP’s. We may face some silly comp struggles on EBITDA given CVNA had a loan backlog to work through in 2023, but the underlying business trajectory is improving quite well.Thanks for reading and subscribe if you’d like.