Carvana Co. (CVNA, Financial) has seen its stock soar in recent months even as the global economy has continued to teeter in the face of widespread disruption of Covid-19 and mounting signs of a deepening recession.
The e-commerce business has won over a horde of enthusiastic investors with its promise to disrupt the used car market with its "intuitive and convenient online car buying and financing platform." Yet, as I discussed in a previous article for GuruFocus, Carvana has struggled to turn its promise into profitability.
With Carvana's stock reaching all-time highs against a backdrop of darkening economic indicators, one might be forgiven for wondering how the company can possibly sustain such gains in its stock price.
Profitability remains elusive
Founded in 2012 and publicly traded since 2016, Carvana is hardly a newcomer to the e-commerce stage. Yet the company has consistently struggled to find its way to a sustainably profitable business model. Despite posting $1.1 billion in revenue last year, Carvana saw its net cash outflow approach $1 billion, $401.6 million of which bled out in the final quarter.
Carvana entered 2020 with its cash balance depleted almost to zero and a debt balance standing at $1.5 billion. With its finances in shambles, Carvana was forced to go to capital markets in March, selling 13.3 million shares of stock at $45 per share and bringing in about $600 million.
Source: data by GuruFocus.com
Things have not improved for Carvana in 2020. In the third quarter alone, Carvana burned through $370.7 million. In the first three quarters, Carvana saw free cash outflow of $717 million, considerably worse than the $586 million net free cash outflow in the same period last year.
All about the top line
Despite its growing losses, Carvana has seen its share price soar in the second half of 2020. While this may seem incongruous at first glance, it begins to make sense when we look at the company's top line growth. Carvana's revenue growth has continued, and even accelerated in recent quarters. In the third quarter, Carvana brought in $1.54 billion – up 41% from the same period in 2019.
Top line growth is at the heart of Carvana's growth narrative. Bullish investors have proven more than willing to tolerate big losses and cash burn in the hope that top line growth will one day translate to the bottom line. Thus far, however, these hopes have failed to materialize even directionally.
Moreover, the top line growth at the heart of Carvana's bulging valuation has been slowing even as cash burn has accelerated. Revenue growth slowed from 181% in 2016 to 101% in 2019. This slowing growth has been even more pronounced this year. In the first three quarters of 2020, Carvana brought in $3.76 billion, compared to $2.84 billion in the same period of 2019. That amounts to 33% growth, which is a worrying deceleration for a company valued on the basis of revenue growth.
My verdict
With a current market capitalization in excess of $43 billion, there is enormous future profitability already priced into this stock. Yet there is little sign of that happening anytime soon, if ever. Thus, it is my assessment that Carvana investors are headed for a rude awakening.
Disclosure: No positions.
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