Carvana, the used car dealer that trusts robotic algorithms to buy your car practically sight unseen, was the third-fastest company to ever make it onto the Fortune 500 — only Amazon and Google did it faster. But for the third day in a row, its stock is trading for just around $7 a share, plummeting 98 percent from its all-time high of over $360 last August.
My first thought on reading the news: maybe the company shouldn’t let robots pay people more than their cars cost brand-new? This February, I sold a seven-year-old car to Carvana for more than I paid out the door and wrote a story about the perfect storm of factors that led to that outcome. (Stimulus checks! Chip shortages! Covid fears! Unheard-of demand for vehicles! Blind trust in algorithms!)
But after reading through the past six quarters of the company’s financial results and shareholder letters, it seems much simpler than algorithms running amok. Carvana’s humans bet badly by buying too many cars. Throughout 2021, as Carvana saw its first and only quarterly profit, the company kept telling investors how it planned to scale up production (read: get more used cars ready to sell) to meet the pandemic’s unprecedented demand.
“Scaling vehicle production as quickly as possible remains a top priority for us,” it wrote in its Q2 2021 report. “Demand continues to outpace our ability to fulfill it, and we are taking many steps to ramp up operational capacity in the near term to catch up to demand and support growth in 2022 and beyond,” the company added for Q3 2021.
But when 2022 rolled around, that growth wasn’t there. Though it invested in increasing its vehicle inventory by roughly a billion dollars’ worth — from $2.3 billion in Q3 2021 to $3.1 billion in Q4 2021 and $3.3 billion in Q1 2022 — Carvana didn’t actually wind up selling that many more cars. It’s averaging 108,000 cars sold per quarter so far in 2022, compared to 106,000 cars each quarter last year. And while revenue has stayed relatively flat, the company is now losing far more money: nearly half a billion dollars per quarter. It’s already lost $1.4 billion this year as it tries to get rid of the extra cars it probably shouldn’t have bought. (The company also sells many cars wholesale, though it gets much less money than when consumers buy and/or finance through its website.)
Carvana quarterly data, Q1 2021-Q3 2022
|Data||Q3 2022||Q2 2022||Q1 2022||Q4 2021||Q3 2021||Q2 2021||Q1 2021|
|Revenue||$3.39 billion||$3.88 billion||$3.5 billion||$3.75 billion||$3.48 billion||$3.33 billion||$2.25 billion|
|Net loss (profit)||-$508 million||-$439 million||-$506 million||-$182 million||-$68 million||($45 million)||-$82 million|
|Retail vehicle sales||$2.49 billion||$2.96 billion||$2.73 billion||$2.9 billion||$2.65 billion||$2.50 billion||$1.8 billion|
|Vehicle inventory||$2.58 billion||$2.87 billion||$3.30 billion||$3.15 billion||$2.29 billion||$1.97 billion||$1.44 billion|
|Gross profit per unit (GPU)||$3,500||$3,368||$2,833||$4,566||$4,672||$5,120||$3,656|
“We generally prepare for sales volume 6-12 months in advance, meaning we built capacity in most of our business functions for significantly more volume than we fulfilled,” the company wrote for Q1 2022. “We reduced our website inventory by -10% sequentially in Q3. We are continuing to normalize our inventory size and expect to further reduce inventory in Q4,” it wrote this past quarter.
Carvana isn’t the only company to think the good times might keep on coming only to get hit with the double whammy of inflation and dried-up demand. Intel also reported a sudden half-billion loss this year as PC industry demand tanked just as it had invested big in GPUs, and Nvidia straight up admitted it built too many gaming graphics cards in an attempt to capitalize on the great GPU shortage. Other chipmakers like Samsung and AMD are seeing profit slumps, too.
But things are much worse for Carvana because so many of the socioeconomic factors that fueled its meteoritic rise have now flipped for the worse. Not just inflation and the economic downturn — gas prices are sky-high, and rising interest rates are making auto loans less attractive, both of which make people less interested in buying cars. Manheim’s Used Vehicle Value Index is showing that the value of vehicles is finally declining again, down 10.6 percent from a year ago, meaning that the extra cars Carvana purchased may be worth less instead of more by the time the company sells them. And with covid fears subsiding, people might be more willing to venture into a dealership again instead of having Carvana drop a car at their door.
Many months after my story about the Carvana algorithms that purchased my Honda Fit, it’s still not clear whether my $20,000 windfall was representative of a real problem for the company or just a fluke. (I never saw them attempt to resell my vehicle, so I can’t say if they actually took a loss.) But aggressive algorithms or not, the aggressive humans at Carvana appear to have led the company into trouble. Here’s hoping this misstep doesn’t result in mass layoffs.