$CVNA Update - Pre Q3

We’ll keep this short and sweet as its about 1:40am on “vacation”. I keep seeming to time these exactly during CVNA earnings. The last one went rather well, so here’s hoping.

Anyways, much of what I quote is basically just the coverage of

Alternative Alpha

With CVNA I’m mostly in the stage of “will the realized numbers match the thesis”. This is going to be a lot more boring than that was happening this time last year, hence why I haven’t written about it as much. We don’t need to game theory debt negotiations and the like as thankfully that has already occurred. The downside of course being that at a vastly higher stock price there is more room for pain. That is why I both delevered my PA and sold quite a bit of CVNA around Q2 earnings.

I do still believe in the company, so I will not be rehashing why I think they have a good customer value proposition, as that has not changed and is only getting better, we’re just focusing on what the numbers might be now, and how that can impact the future.

Q3 Results:

Rough estimates - units will be around ~82k vs something like 79k expected. These sell side estimates are stale and they will never be accurate. They can’t just quote alt data numbers so they say something silly and update estimates to 80.8k or something due to “good auto markets”

ASP will be $24,000 or so. I don’t particularly care about this #, but if you’re interested.

Retail GPU will likely be up - to what is a harder question, but many positives for them QoQ such as more reconditioning’s to spread costs, shorter sales cycles, better pricing, etc. Adding at least a few hundred of retail GPU seems easily doable QoQ

Same with wholesale GPU for similar reasons.

Finance GPU is just going to be any weird backlog stuff or adjustments or whatever. The headline result doesn’t matter much. core finance GPU likely flattish given rate dynamics and I believe customers are starting to push back a bit on rates+prices

SG&A down per unit given better fixed cost spread. Overall cost probably up given higher absolute units. Curious what logistics costs look like given much shorter delivery estimates.

Net result like ~$150m in AEBITDA or something.

None of this particularly matters longer term, just rough expectations if anything is drastically different. We’ll get to what matters in a sec.

Q4 Expectations:

Unit guide down, 73-75k or something. Seasonality is tough and so is just a weaker auto market.

ASP down a few %

GPU down across the board given lower vehicle prices, higher rates into weak consumers, lower volumes, etc.

SG&A per vehicle up or flat QoQ given volumes.

Stock expectations:

To summarize, Q3 better than expected with probably silly looking economics boosted by loan backlogs, abnormal pricing environments coming off the back of Q2 appreciation, and higher unit volumes.

I doubt the Q3 economics are sustainable, and most others likely will doubt as well given Q4 guidance is going to be a QoQ negative. Some may view this as a regression, rightfully or not.

What really matters I believe is going to be managements story telling capabilities. It is entirely possible that CVNA was somewhat supply constrained in Q3 given layoffs in recon in Q4 of 2022 and Q1 of 2023 mixed with oversaturated inventory levels. They did a big hiring push starting in Q3 for reconditioning related roles and plan to provide a tour for investors of an IRC later this year. The obvious messaging likely being “hey look we can ramp”.

If CVNA was indeed supply constrained, it would imply that Q2/Q3 economics were perhaps higher than would be expected on the pricing side of things, which seems to be the case as we’ve seen some pricing power recede into Q4.

OTOH, delivery times continue to improve, average sales age continues to improve, optimization of pick up/delivery and such continue to improve, etc. Pin pointing a steady state retail GPU is quite difficult given all the moving parts. We’d also expect fixed costs to keep dropping if they can grow units in Q1, as they’re currently running at only a fraction of their capacity.

As will all narratives there is truth to both sides, so hard to know if the stock is going to be spooked by guide downs concerned about temporary economic boons while ignoring permanent gains and seasonality, or rally due to permanent gains and forward growth. I take no view so I’m not doing anything with my position, but do have some cash on hand if prices get silly. CVNA currently represents some double digit % of my portfolio.

What Matters:

Going forward what I’m interested in from this report is a couple things

1. Commentary on structural margin improvements from growth - have to take anything with a grain of salt but more color on fixed vs variable costs especially the “Other SG&A” bucket is always a plus.

2. Advertising efficiency will be a big question - if they spent less per unit in Q3 while seeing growth that would be lovely. GPU and such changing with pricing I don’t care much about, but if units can grow without ramping marketing simply as consumers start transacting more, that would be a big boon and prove out the customer value prop further.

3. Logistics efficiency is a big personal question. If they can cut down times while saving money it just makes them that much better than anyone else at vehicle delivery.

4. Any continued structural progress in margin not mentioned above.

Overall CVNA has done very very well at gaining margin, so the key question is how much they have to give back to grow. In theory they shouldn’t have to give back much more than price, which is certainly a driver but not the only one. If we can see inflection across line items while growing QoQ with commnetary on future improvements, that’s a huge plus.

Fin:

Until next time - I will drop a CDLX update pre earnings. I am very very excited about CDLX and it represents a very silly % of my capital. More details soon.