After getting off to a rocky start in 2020, Carvana Co. (CVNA, Financial) stock has been on a roll. The online retailer of used cars has enjoyed a tailwind similar to that experienced by many other e-commerce players, buoyed by the prospect of consumers shifting ever more spending online in reaction to the pandemic.
Carvana's recent gains have reinvigorated comparisons to Amazon Inc. (AMZN, Financial), the undisputed king of e-commerce. Yet, while Carvana's stock price may seem to suggest that the comparison is valid, a closer inspection reveals something else entirely.
Spend money to make money
As I noted in a previous article for GuruFocus, Carvana has struggled with persistent losses since its inception in 2012. Yet investors have proven more than willing to shrug off hits to the bottom line so long as the top line continues to expand. A bullish investor might even contend that profitability is not Carvana's goal at all – for now, at least. Rather, Carvana may be spending big to increase its market share, much like Amazon did during its early years in business.
Indeed, analysts and commentators have been making this observation with increasing frequency in recent years. In October 2019, stock commentator Taylor Carmichael made the comparison explicit:
"Carvana is a retailer (just like Amazon), and it is using technology and the internet to destabilize existing markets (just like Amazon)...Carvana is competing with brick-and-mortar retailers. And we all know how this story ends. The internet is faster, cheaper, and better than brick-and-mortar retail."
On the surface, the Amazon analogy makes some intuitive sense. After all, Amazon eschewed profitability for years in order to grow from an online bookseller into an e-commerce and global logistics juggernaut. However, the comparison falls apart when one considers both why and how Amazon was ostensibly spending money to fuel growth.
Cash flow beats cash burn
In business, cash is king. From the very beginning, Amazon took that saying to heart. For years, Amazon posted wafer-thin profits (at best) each quarter. This was not because the business was faulty or hampered by low margins. Indeed, it quickly expanded into a powerful cash generator. But that cash was rarely reported as net income; instead, it was reinvested to fuel rampant expansion into other profitable verticals.
It is here where the comparisons between Amazon and Carvana start to break down. Whereas the e-commerce giant built a business quite quickly that was capable of tremendous cash flow generation, which it then reinvested to fuel growth, Carvana has faced persistent cash outflows for years. Brad Munchen, a hedge fund manager focused on automotive stocks, pointed this out in no uncertain terms on Dec. 1, observing that Carvana "has never had one quarter of positive FCF since it was listed in 2016."
Amazon's massive growth was built on a foundation of cash flow generation and reinvestment. Carvana's growth has been fueled by unsustainable cash burn. That makes any comparison between the two companies' business models flawed at its core.
My verdict
The similarities between Carvana and Amazon are only skin deep. Yes, both are e-commerce players with strong revenue growth, but that is essentially where the similarities end. Carvana shows no sign of transiting from punishing cash burn to meaningful profitability anytime soon. Based on its expanding losses amid slowing top line growth, I see little hope of Carvana delivering meaningful positive economic returns for its investors, either in absolute terms or relative to its bulging valuation.
Carvana investors hoping for a sudden shift from punishing losses to Amazon-style profits might be wise to rethink their investment thesis.
Disclosure: No positions.
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