Picking up where I left off last week...
In Friday's e-mail, I shared links to four bearish reports (and here's another one I just read) from some of the smartest short sellers I know on online used-car retailer Carvana (CVNA).
As I said, the bear case is so compelling that I added Carvana to my "Stinky Six" list of stocks to avoid.
However, it's an interesting enough company – and has enough credible supporters – that it's worth a closer look. As I always like to do as a starting point for any company I'm analyzing, let's examine the historical financials and valuation...
As I noted in Friday's e-mail, Carvana soared by about 130 times from its lows less than three years ago. Take a look at the wild chart I shared:
Not surprisingly, the stock's gains have been driven by a surge in revenues and – especially – profitability.
After seven years in consistently negative territory, Carvana's operating income turned positive in early 2023. It has exploded upward since then – reaching more than $550 million in the most recent quarter. Take a look:
However, I'm always suspicious of companies that extend credit to their customers – especially subprime ones – and then use "gain on sale" accounting to book profits.
So let's take a look at Carvana's free cash flow ("FCF"). Here's a chart of the company's FCF, operating cash flow, and capital expenditures ("capex"):
As you can see, Carvana has low capex – that's a plus.
And, after burning a cumulative roughly $8.2 billion of FCF from the fourth quarter of 2015 through the first quarter of 2023, the company has turned things around and generated about $2.2 billion of FCF since then.
But note that FCF is erratic and has declined since the 2023 highs. And this compares with the steady rise in profitability that the company shows on its income statement. This disconnect can be a warning sign.
Next, let's turn to the balance sheet...
Carvana's net debt has been improving in recent years – declining from a peak of about $8.2 billion at the end of the first quarter of 2023 to around $3.1 billion in the most recent quarter. Take a look at this next chart:
Some of this debt reduction is due to FCF. But the majority is from cash generated by selling stock.
A big sale of roughly $1.2 billion happened in the second quarter of 2022 to stave off bankruptcy. And then subsequent issuances, as the stock rallied, were to strengthen the balance sheet. Here's how this looks on the chart:
Of course, there's a price to pay for issuing so much stock... a rising share count that dilutes shareholders.
In Carvana's case, the increase has been enormous – rising nearly 10 times in the past eight years from 15 million to more than 146 million:
In summary, my assessment of Carvana's financials is mixed...
After seven years of very poor results, the company has really turned things around. I can see why the stock is up – but by roughly 130 times?
Lastly, let's look at valuation...
On Friday, CVNA shares closed at $455.68. Meanwhile, analysts expect earnings per share ("EPS") this year of $4.88 and $7 next year. That means the stock is trading at a nosebleed 93.4 times this year's EPS and a slightly less ridiculous 65.1 times next year's EPS.
Those are extremely high multiples.
As the bulls argue, the high multiples aren't crazy if Carvana can actually grow its earnings by the massive 43% that analysts expect. Of course, if growth slows... look out below for this stock.
Again, Carvana is on my "Stinky Six" list of stocks to avoid. But as I said, this is still an interesting enough company. And it has plenty of credible supporters. So in tomorrow's e-mail, I'll hear out the bull case for the stock... Stay tuned!
Best regards,
Whitney
P.S. Greetings from Nairobi, Kenya!
I'm spending two weeks visiting my parents, who've retired here.
My wife Susan and I flew in Friday night on a 14-hour nonstop from New York's John F. Kennedy International Airport. It's a bear of a flight in economy class, so we always ask when we're checking in if there are paid upgrades to business class – and there were (for $1,200 each). I'll generally pay $100 per flight hour for a flat-bed seat, so we grabbed them.
We played tennis on Saturday and yesterday at my parents' club – and I tried padel for the first time. It's a combination of squash and tennis that many of my friends have been raving about, and I can see why – it was great fun! Here are a couple pictures:
P.P.S. I welcome your feedback – send me an e-mail by clicking here.