Our Contrarian Take is up +63%

Carvana (CVNA) taught us an enormous lesson: Don’t Bet Against the Consumer

In early January, Hindenburg Research published a report targeting Carvana, alleging that 26% of the company’s gross profit comes from selling customer auto loans to third parties.

The report questioned the sustainability of this revenue stream, arguing that it masked fundamental weaknesses in the company’s business model. Concerns over Carvana’s debt load and prior financial struggles led to a sharp decline in the stock.

Carvana swiftly countered these claims, calling them misleading and biased.

The next day — as shares continued to fall — we went live on Schwab and assessed the situation armed with valuable consumer insights: Carvana was not a name we would bet against. Consumer interest was rising!

The stock is up 63% since then.

Over the past year and some change, Carvana has executed a sharp turnaround from what many thought was an imminent bankruptcy. In mid-2022, the company was drowning in debt, facing liquidity issues, and burning through cash at an unsustainable rate. With interest expenses rising and profitability in question, shares plummeted over 98% from their peak, dropping below $5 in early 2023. Investors doubted Carvana’s ability to survive as its debt burden exceeded $6 billion, forcing the company to take drastic measures.

The leadership team responded with aggressive cost-cutting initiatives, reducing expenses by over $1 billion through workforce reductions, operational efficiencies, and tightening inventory management. Carvana also negotiated a crucial debt restructuring deal in mid-2023 that extended maturities and eased financial pressure, preventing the company from running out of cash. These actions, combined with an improving used car market and rising consumer demand, laid the foundation for a stunning reversal.

Fast forward: CVNA Shares have risen +450% YoY, driven by these strategic moves and a return to profitability. The company has exceeded earnings expectations with triple-digit surprises, forcing many who doubted its viability to reassess.

Carvana’s most recent earnings report reflected significant momentum. Revenue increased 32% year over year, while unit sales rose 34%.

The stock surged 20% following the report.

Consumer behavior confirms continued market share steal for CVNA from larger used-car peer, CarMax (KMX).

Carvana's web traffic is up 19% year over year, compared to a 7% decline for CarMax. Increased engagement signals growing demand. More visitors translate to more transactions, reinforcing Carvana’s growth trajectory.

The company is also earning more per sale.

Gross profit per unit has climbed 24% year over year to $7,427, far outpacing CarMax’s $2,306 per retail unit and $1,015 per wholesale unit. Carvana’s ability to maximize per-unit profitability through pricing optimization and cost efficiency has set it apart from competitors.

Despite the skepticism in January, Carvana’s ability to attract consumer eyeballs remains. Consumer demand is holding strong, and operational execution continues to drive results. With another earnings report on the horizon, expectations are high. Given the company’s track record over the past year, another surprise isn’t out of the question.

We remain cautiously optimistic. Betting against Carvana has not worked well in the past, and until the consumer data shifts, we see no reason to change course.