$CVNA Pre-Earnings Outlook

Hi friends, we’ll keep this one short and focus on highlighting some important KPI’s and such ahead of CVNA earnings tomorrow. I remain generally bullish on the stock and it continues to be a top position ahead of earnings.

Q4 Results:

For Q4 there was nothing particularly special happening at CVNA. Q4 is seasonally the weakest quarter due to consumer spending focusing on Black Friday and Christmas as well as Halloween. The numerous holidays also depress sales, which is particularly relevant for Christmas and New Years as those tend to be the lowest sale weeks of the year for CVNA given they allow employees to have the day off mixed with occasional winter weather conditions causing significant delivery delays that punt deliveries into Q1.

As a result units will be down QoQ, likely in the range of 75-77k unit sales vs ~81k in Q3 and ~87k in 2022. As a result we’ll see unit sales down about 11-13% YoY and ~5-7% QoQ. While in technical terms this is a “shrinking” result, it’s a marked improvement vs Q3 negative comps of ~20% YoY decline. Additionally it’s simply a better business currently, running much leaner on inventory and as a result days to sale. Delivery times declined throughout the quarter while price taking rose as ASP’s were relatively flat versus a declining market overall in addition to better take rates via fees.

Thus while the topline will likely look a touch worse YoY, the key indicator in the Q4 results is the direction the business is moving. AEBITDA should be improving given the focus on efficient operations and price taking, with continued positive trajectory into Q1.

Overall the Q4 results are not enough to justify the current stock price and you’ve likely seen plenty of negative sentiment regarding the valuation as a result, especially given weaker market wide performance and ASP degradation. Thankfully alt data exists and we already know how half of Q1 has gone!

Q1 QTD:

Thus far in Q1 CVNA sales are up ~8% YoY according to

Alternative Alpha

. Given the seasonal strength of the March-June period, this implies unit sales somewhere in the range of 87-93k for Q1 which would represent an 8-15% YoY growth rate, a significant improvement QoQ.

At the point for the TTM we’d have sales comps vaguely as follows:

Q2 2023: -35%

Q3 2023: -29%

Q4 2023: -11% or so

Q1 2024: +10% or so

A rather significant change in momentum, which was sort of the entire thesis. In theory, these comps only continue to improve as CVNA becomes a better product AND a better business simultaneously.

At the same time the business has rapidly improved how topline converts to bottom line, with GPU structurally higher to a significant degree YoY. We continue to see progress here with their ABS transactions continuing to tighten spreads, continued better pricing durability than the market, all while improving the user exsperience via shorter delivery estimates and time to sale.

The company is also significantly leaner with inventory down ~50% YoY. As a result future ASP drops will likely be a benefit if anything given they sell through inventory extremely quickly and do not face significant GPU pressure from declining car prices.

While CVNA does still need to grow quite a bit more for debt to no longer be an issue, the restructuring of last year has provided them ample time to do so. As a result if one can be convinced that they are able to meet the growth requirements to stay liquid, the business faces no currently foreseeable existential threats. Given the blatant acceleration in YoY comps and continued progress, this seems like a rather likely scenario. As a result the question turns simply to what is a reasonable valuation for CVNA?

TTM volumes are something like 310k. If we assume a ~15-20% unit growth rate for 5 years, we’d end somewhere around 600k-800k. EBIT per unit at such a point can likely be in the $1,800 to $2,200 range (rather similar to KMX and others). Taking all the midpoints we can call it ~$1.4b of EBIT in 5 years for a company with no existential threats and a locked in significant competitive advantage (as discussed in the last article). Off the top the current enterprise value is somewhere around $15b (and of course highly variable), so we’re trading at about 10x 5 year forward EBIT.

There will of course be a quite significant dispersion of outcomes there as growth rates, unit economics, and the I, T, D, and A portions of EBITDA are all highly variable and interdependent, but the core assumptions seem to be roughly what I’m outlining as 10x 5y forward for a pseudo monopoly with upside option value seems somewhat fair.

The real oppurtunity with the CVNA valuation is what can happen if they significantly accelerate in growth at even better unit economics than industry average? The business has gotten very lean over the past 12 months and seemingly continues to stack price taking onto the model via fees, robust ASP’s, and improving finance GPU. The ADESA model also allows for what can in theory be structurally higher wholesale revenue and margins compared to traditional players. It is entirely possible that CVNA’s ~10% Q1 2024 growth rate continues to improve as it has over the past 12 months, especially if we ever reach a peak in price taking and as consumer experience continues to improve via faster delivery times.

The result ends up being highly theoretical but it’s trivial to see how consumers spend copious amounts on the likes of Grubhub and Doordash at significant premiums (>20-30%) for minor time savings. This behavior seems to be evolving at CVNA despite market wide weakness and combined with the structural advantage of ADESA could easily lead to EBIT per unit >$2,500-$3,000 at significant growth rates, with possible future option value in more attaches such as service/warranty or new vehicle delivery.

In such a case if CVNA theoretically scaled to 1m units at ~$2,750 EBIT per car, we’d be talking ~5.5x EV/EBIT in 5 years or so, with minimal additional required CapEx.

I’m not saying the above scenario will happen, what matters is simply what people BELIEVE will happen. The likelihood of that story continues to climb as the business improves, which leaves significant upside on the table given the lack of downside threats beyond macro collapse which seems increasingly unlikely.

Summary:

Overall, I believe the Q4 report will be quite beneficial to CVNA in dispelling some uninformed narratives such as those I’ve commented about on Twitter recently wherein generalists have surface level opinions on CVNA based on weaker industry competitors. The idiosyncratic favors are highly in their favor and alt data has pointed to significant QoQ improvements as we approach Ernie’s path to growth. As a result CVNA remains a significant portion of my personal and managed portfolio.

That being said of course there are no guarantees and NVDA results are being pushed as I post this which may have significant market wide valuations impact even if semiconductors aren’t particularly relevant to used car sales. C’est la vie.

Cheers and feel free to subscribe.