ADESA Mega Sites Integration Will Increase Retail Unit Capacity

Key Takeaways

• Expansion of ADESA sites will significantly boost capacity, driving future revenue and market share growth.
  
• Focus on operational efficiencies and technology investments to enhance customer experiences and improve financial metrics.
  
• Carvana's ambitious expansion and capital-intensive strategies could strain liquidity, depress margins, and pressure revenue if operational execution falters.

Catalysts

Operates an e-commerce platform for buying and selling used cars in the United States.

• Carvana's integration and expansion of its ADESA mega sites are expected to significantly increase retail unit capacity from 1 million to approximately 3 million, offering substantial scale-up potential which can drive future revenue and market share growth.
  
• The company has realized industry-leading adjusted EBITDA margins and anticipates further operational efficiencies and fundamental gains that should bolster net margins and consequently, adjusted EBITDA and earnings.
  
• Carvana is leveraging its significant investment in technology and vertically integrated model to enhance customer experiences, reduce costs, and improve transaction efficiency. This positions it to capitalize on increased revenues and net income due to higher customer conversion and satisfaction.
  
• Carvana’s commitment to further leveraging its finance platform and maintaining a strong inventory selection is seen as key to boosting retail unit sales and improving gross profit margin by optimizing loan sales and reducing operational costs per unit.
  
• With a strategic focus on deleveraging and enhancing its balance sheet, Carvana aims to improve its credit rating, thereby reducing finance costs and improving net operating income, setting a strong foundation for long-term growth and investor confidence.

Carvana Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Carvana compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Carvana's revenue will grow by 25.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.5% today to 6.8% in 3 years time.
• The bullish analysts expect earnings to reach $1.8 billion (and earnings per share of $6.89) by about April 2028, up from $210.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 61.0x on those 2028 earnings, down from 155.8x today. This future PE is greater than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Carvana Future Earnings Per Share Growth

Risks

• Carvana's ambitious expansion plans and reliance on scaling operations, including the integration of ADESA sites, could face operational challenges, potentially impacting earnings and net margins.
  
• The ongoing investment in increasing inventory and inspection capacity requires substantial capital, which might strain the company’s liquidity and financial resources, affecting net income and margins.
  
• Market share claims and high growth expectations put Carvana under pressure; failure to execute effectively on these fronts could harm both revenue and profitability.
  
• Changes in retail unit growth and geographic expansion, if poorly managed, could result in excess supply that devalues inventory and depresses net margins.
  
• The emphasis on credit metrics and sequence of issuing new equity suggests a cautionary focus on leverage that may affect shareholders' returns and potentially lead to stock dilution, impacting overall earnings.

Valuation

• The assumed bullish price target for Carvana is $340.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Carvana's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $340.0, and the most bearish reporting a price target of just $108.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $26.9 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 61.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $243.59, the bullish analyst price target of $340.0 is 28.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.