Quick $CVNA Warmup

Keeping it short and sweet since this story is rather boring now (in terms of business trajectory, not necessarily stock attractiveness).

CVNA is a pretty simple story to understand. 2017-2021 were phenomenal with growth and economics headed in the right direction. 2022 saw mini economic crash relative to the covid stimulus highs mixed with some unfortunate timing with a large debt funded purchase. Rather easy to argue they got a bit gung-ho after winning on repeat for a few years. Sales pulled back (somewhat intentionally), causing the unit economics to unwind and forcing the business to do a mini restructuring to face a higher cost of capital world.

Sometimes business booms, sometimes it busts, tale as old as time. In this case the debt load made some people nervous the bust was the last hoorah, and it was possible to make very high returns betting it wasn’t. Those days seem to be behind us as previously mentioned, I doubt there are any bankruptcy concerns in CVNA’s near future due to efforts to shore up the balance sheet, and as a result the stock is drastically higher.

In short, a lot of previous game theory and being smart or lucky depending on your POV isn’t relevant to my future judgement. Basically the questions that need to be answered with CVNA have changed significantly since I first got involved. I still think I know what I’m doing, but keep that in mind.

Anyways.

Q1 Results and Q2 QTD

Q1 for CVNA seems pretty average. I tweet about unit sales occasionally but the summary is a slight beat vs expectations at +13% or so to 91-92k is the alt data expectation. Slightly better than they were guiding on the Q4 call, but that was evident at the time and has been cemented for over a month now. ASP’s pretty similar QoQ and I’d imagine GPU is pretty similar as well if you normalize out loan sale timings and the like which may continue to remain volatile. SG&A per unit will likely get slightly better given more volumes, but I wouldn’t be surprised if they also spend some more on advertising given high GPU’s all but guarantee their incremental margins have to be exceedingly positive. None of that is particularly important.

My overarching view is that CVNA has basically “solved” their unit economics. GPU is very high and SG&A has been made drastically more efficient. They get slightly better QoQ for the last couple quarters, but that is no longer the main focus. The main focus at this point is growth. As a result, the Q1 results aren’t particularly meaningful considering we are already 1/3rd of the way through Q2 and get live sales updates via alt data.

For Q2, QTD sales are +30% or so YoY and on track to be around the high 90 thousands. Obviously in 2023 volume was intentionally being sacrificed to some degree, so whether CVNA can continue to grow 30%+ is the question. If so, and assuming one believes the incremental unit economics are very positive, then you can get hundreds of millions of additional EBITDA each quarter in 2025, continuing on in 2026, etc.

The key question really is why is CVNA winning share and is that durable? It can be easy to take the view that they’re simply bouncing back from self-imposed share loss in 2023, however they haven’t really given anything back on economics that would make that obvious to me, if anything they’ve grown GPU since this time last year.

My simple ongoing theory is that CVNA is simply a better business proposition than any competitor can offer in a highly fragmented industry that will naturally consolidate given the ease of access of online commerce. As the latent societal awareness of such a business increases, it should only continue to gain mind share (barring any fuck ups) and the requisite >$10b of invested capital to make the model possible is simply infeasible for anyone else to do.

Basically we’re back at the 2021 thesis of “what is the TAM and how much will they get”. If someone finds a good answer on how to answer that question definitively, my DM’s are of course open. My natural inclination is to not particularly care about the specificity of the TAM, simply that >30% current growth implies it is quite a bit larger, >100% growth even pre-covid implies it is larger, taking thousands of additional dollars per transaction while also growing 30% implies it is quite a bit larger, etc.

These types of businesses often operate to some extent on consumer “vibes” wherein scale hasn’t been achieved to guarantee mindshare lock-in versus alternatives, yet they’re large enough to suddenly accelerate. I currently believe CVNA’s largest growth inhibitor is probably simple inventory availability which is implied given tight QoQ inventory levels in Q1 and Q2 combined with clearly positive incremental margins. Thus if they can “solve” that and the vibes continue to be good, there really is no limit in what they are capable of (within reason, I doubt they sell more than 2 million cars per year in any appreciable time frame simply due to CapEx and hiring requirements).

In such a world generating at least $4-5b of EBITDA seems possible vs an enterprise value of somewhere along the lines of $23b depending on the day. Not hugely expensive for a potential monopoly, but not drastically cheap either if things don’t go vaguely as expected.

As a result I’m happy to hold the shares if they continue to grow well. These upcoming earnings don’t have much impact on that even if I think they have the potential to be positive for the stock price in the near term given performance above expectations. I won’t pretend to know how many cars they will sell a year from now (even they don’t know) so CVNA has become a pretty simple story of show don’t tell.

Not the most interesting thing in the world, but that’s how it is sometimes. If growth does de-accelerate in an unexplainable way, I’ll certainly tweet about it.

If you’re bored, I’m generally positive on the earnings report given recent sales trends and I’d expect Q1 revs to be above expectations. You can always head to my little side project at Clarity Markets to toss up a CVNA Q1 revenue prediction if you feel so inclined.

Cheers.