Carvana: Doubt To Dough, How Changing Your Mind Makes You Money (NYSE:CVNA)

Investment Thesis

I don’t believe it makes sense to be bearish on Carvana Co. (NYSE:CVNA) any longer. I know that it’s not popular to hold a positive view of Carvana’s prospects, but I can’t help myself.

At the core of the matter is that I don’t believe that Carvana’s prospects are as dire as many investors contend.

Consequently, I turn tepidly bullish on this stock.

A Recap of My Position

Allow me to recap my position. In my previous article, I said, right at the top:

Recall, this is what I previously voiced about Carvana.

Simply put, this is my contention: I was ahead of the curve at a time when analysts were still bullish on Carvana Co. But today, analysts have nearly unanimously moved to the other side of the boat. Today, the consensus view is to be bearish on CVNA.

And yet, with the stock very close to an all-time low, I no longer believe it makes sense to be as bearish on CVNA.

My argument is thus, if CVNA can survive the next twelve months, then it will most likely succeed in avoiding bankruptcy.

What Lessons Can We Take Away From This?

I cleanly articulated to avoid Carvana when the stock was at $26, see here.

I then said at the bottom, in an analysis called Next Chapter,

I declare that for CVNA the next twelve months are crucial. If, and it’s a big if, CVNA can survive the next twelve months, its prospects could rapidly improve.

I’m not trying to insult anyone’s intelligence in reverse engineering this trade. What I am saying is this,

Good traders liquidate when they are wrong, great traders reverse when they are wrong (Jack Schwager, Market Wizards series).

Right at the bottom, when everyone could only see despair, I believed that it no longer paid to be bearish. I’m not a great trader, as Schwager points out in the quote above, so I wasn’t able to pull the trigger.

But I was savvy enough to recognize a simple risk-reward balance of staying bearish. With that in mind, what now makes me bullish on Carvana?

Revenue Growth Rates Look Atrocious, Right?

This is what everyone is concentrating on, the dismal revenue growth rates of Carvana.

I see little value-add to spending time discussing this aspect. This is true, pre-owned vehicle sales are in a tough spot right now. It’s a cyclical market. Everyone knows this and has priced this insight into the outlook already.

Where I believe the value-add to our discussion comes from is looking ahead. Attempting to figure out the answer to this question. Will Carvana be able to survive this downturn? Because that’s where the real return is made.

Will Carvana Survive?

Carvana makes the case that it will be EBITDA profitable this quarter. Now, Carvana’s management will say many things.

Indeed, given where we are right now, I believe that it’s fair to say that in the past, Carvana’s management may have been slightly prone to overpromising.

But at the same time, consider this, Carvana’s management has been steadfast in its determination to reach profitability. Case in point, after reporting negative 10% adjusted EBITDA margins in Q4 2022, it improved its adjusted EBITDA margins to approximately negative 1%.

Accordingly, allow me to advance the following argument in an effort to further clarify the bull case.

I don’t know if investors right now are being asked to ”believe” that Carvana can get its EBITDA margin to 8% any time soon.

The only thing that investors need to home in on is Carvana’s balance sheet. Everything else in the near term is a distraction.

And indeed, here’s where the plot thickens further. Carvana has tried several times to refinance its convertibles notes and has not succeeded.

Carvana needs to find $500 million of cash to repay the debt holders over the next 2 years.

That being said, the bull case is this. Every day that the share price stays high, is yet another day that Carvana is able to dilute shareholders and raise capital. And the longer that Carvana is able to go without further diluting shareholders, the less diluted shareholders will be.

Furthermore, at the current market cap, Carvana will only ”only” need to dilute shareholders 20% to put off near-term bankruptcy.

The Bottom Line

Here I describe my journey from doubt to dough. How I was able to pivot and go bearish when many were still bullish. And then pivot again at the bottom.

How I waited for there to be clear signs of stability before assigning my buy rating on Carvana Co. stock.

This is my critical contention.

In investing, the real dough is not made by buying something at the brink; buying the proverbial falling knife and betting on a return to glory. That is an extremely high-risk strategy that sounds great at cocktail parties and is awesome for one’s ego, but rarely allows anyone to seriously compound wealth (note there are some well-known exceptions to this, of course, for example, Carl Icahn, Elliott Management, and others).

I believe that the real dough is made by following Warren Buffett’s footsteps. Buying companies that have fallen on challenging times, and ”betting” that those businesses will continue to stick around for a while. But not taking on needless risks, when the outlook is still unclear.