Elevating Customer Experiences And Operational Efficiencies To Fuel Remarkable Growth

Key Takeaways

• Carvana's focus on enhancing customer experiences and service offerings aims to distinguish it from competitors and drive revenue growth.
  
• The company plans to leverage its physical capacities and operational efficiencies for increased sales volume and reduced costs, improving net income margins.
  
• Carvana's financial narrative centers on the challenges of sustaining profitability through variable cost management, risks of facility underutilization, and the precarious balance between customer value and profitability amidst market flux.

Catalysts

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

• Carvana's commitment to continuous improvement in customer experiences and incremental sales, which is expected to drive further growth in revenues as they capitalize on being a unique provider in the market. This focus includes plans to enhance their service offerings to stand out from competitors and attract more customers.
  
• The company's anticipation of leveraging existing physical and real estate capacities to significantly increase volume. This expectation of an uptick in sales volume is likely to positively affect net revenues, considering they are built to handle approximately 3x their current sales volume without proportionately increasing fixed expenses.
  
• Carvana's ongoing efforts to achieve further fundamental gains in variable costs and gross profit, where recent improvements have shown a potential impact on net margins. This effort is rooted in optimizing operations and making specific enhancements to their business model that could materially impact costs.
  
• Aggressive plans for SG&A expense leverage over time, driven by operational expense improvements and the scale of the business. This strategy could result in reduced operating costs per unit sold, improving net income margins as they grow.
  
• A disciplined financial strategy aiming at debt reduction and cash interest expense management, which could strengthen the balance sheet and enhance Carvana's ability to invest in growth opportunities. This financial discipline is expected to positively influence both Carvana's earnings per share (EPS) and its overall financial health, enabling sustained long-term growth.

Assumptions

• Analysts are assuming Carvana's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.1% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $630.4 million (and earnings per share of $2.48) by about September 2027, down from $714.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $795 million in earnings, and the most bearish expecting $198.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 82.0x on those 2027 earnings, up from 23.1x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 10.02% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Risks

• High reliance on achieving further fundamental gains in variable costs and gross profit to sustain profitability, which may be challenging if operational efficiencies plateau or unforeseen costs arise, potentially impacting net margins and earnings.
  
• Risks associated with carrying the physical capacity for approximately 3x current volume, which may lead to underutilization if anticipated growth in sales volume does not materialize, adversely affecting net margins due to high fixed expenses.
  
• The company's aggressive unit economics improvements and SG&A leverage strategy hinge on continued growth and scale efficiencies which could be impacted by market saturation, consumer demand shifts, or increased competition, threatening revenue growth and earnings.
  
• Dependence on market conditions to support higher spreads between wholesale and retail prices, which may not persist, potentially reducing retail GPU and impacting overall profitability.
  
• The strategy of passing more value back to customers to drive additional growth involves a delicate balance between improving customer experience and maintaining profitability, with the risk that increased costs may not be fully offset by revenue growth, affecting net margins.

Valuation

• The analysts have a consensus price target of $149.47 for Carvana based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $72.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.4 billion, earnings will come to $630.4 million, and it would be trading on a PE ratio of 82.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of $133.41, the analyst's price target of $149.47 is 10.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.