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Carvana Co.


Wall street consensus:

### Carvana Co (CVNA) Consensus Report Summary

#### Performance Overview:
The consensus from Morgan Stanley's research reports presents a cautiously optimistic outlook on Carvana Co. Both reports acknowledge the company's notable transition from a distressed equity to showing signs of an operational turnaround, emphasizing the third consecutive quarter of positive EBITDA. They commend Carvana's strong growth and EBITDA guidance for the first quarter, attributed to operational improvements and a reduction in financial cash burn. Despite these positive developments, both reports maintain an "Underweight" rating with concerns over high valuation compared to peers and potential share price volatility influenced by financial leverage and uncertain macroeconomic factors.

#### Synthesis of Key Topics:

- **Operational Turnaround**: There's a unanimous view on Carvana's successful transition, which has enhanced its short-term financial outlook. This turnaround has been driven by substantial operational efficiencies and a restructured interest burden.

- **Financial Leverage and Market Position**: Both reports highlight concerns over Carvana's considerable financial leverage and its implications on share price volatility. The uncertain market environment, especially concerning consumer credit and the ABS market, poses potential risks.

- **Revenue Growth and EBITDA Margins**: There's optimism regarding Carvana's long-term growth trajectory, with projections of more than doubling revenues and achieving high single-digit EBITDA margins. However, concerns persist on whether Carvana's current market valuation fully accounts for these growth prospects against ongoing market challenges.

#### Consensus on Future Investment Considerations:

1. **Operational and Financial Stability**: Key to Carvana’s future is the sustained efficiency in operations and effective management of financial leverage, crucial for mitigating share price volatility and fostering growth.

2. **Growth Justification vs. Market Valuation**: Investors are advised to carefully assess if Carvana’s ambitious growth targets, including market share expansion and EBITDA margin improvements, justify its high market valuation, considering the broader industry standards.

3. **Monitoring of External Market Pressures**: Carvana's exposure to used car market trends, consumer credit conditions, and ABS market dynamics necessitates continuous scrutiny, as these factors substantially influence operational stability and financial health.

4. **Valuation and Asset Risk Management**: The valuation of Carvana’s inventory and the broader used car market trends remain critical. Effective management of asset valuation risk and financial leverage will play pivotal roles in Carvana's long-term success and investment attractiveness.

In conclusion, while Morgan Stanley's reports recognize Carvana's recent operational accomplishments and its path towards sustained growth, they advise a cautious investment stance. Concerns around valuation, financial leverage, and external market pressures underpin the need for continuous monitoring of Carvana's performance and strategic decisions.


​Recent Conference Call

# Summary of Carvana Co. FQ4 2023 Earnings Call

**Insightful Quote from CFO, Mark Jenkins:**
"Our fourth quarter highlighted the significant and sustainable progress we have made on our path to profitability. We set company records for fourth quarter and full year total GPU and adjusted EBITDA, completing a year in which we improved adjusted EBITDA by nearly $1.4 billion and positioning us well for further adjusted EBITDA growth in 2024."

## Key Quarterly Business Trends:

1. **Sustainable Path to Profitability**: The company showcased a significant improvement in profitability with record fourth-quarter and full-year total Gross Profit per Unit (GPU) and adjusted EBITDA. This highlights Carvana’s effective transition towards sustained profitability amidst challenging economic conditions.

2. **Improving Efficiency and Infrastructure**: Carvana is continuously enhancing its operational efficiency and leveraging its unique and powerful infrastructure. The company's vertically integrated business model and unmatched infrastructure have been key to maintaining competitive advantage and offering superior customer experiences.

3. **Focus on Growth with Efficiency**: While demonstrating record profitability, Carvana also hinted at early signs of growth. The company expects retail unit growth on both sequential and year-over-year bases in Q1 and the full year of 2024, showcasing confidence in leveraging its strong infrastructure for scalable growth.

## Critical Analyst Questions:

1. **Tax Refund Season and Credit Typing (Sharon Zackfia, William Blair & Company L.L.C.)**: Question about Q1 growth expectations considering the tax refund season and credit tightening.
- **Management’s Response**: Expectations for Q1 are premised on normalcy around the tax refund season. The recent credit tightening and adjustments have been factored into the guidance, with no out-of-ordinary assumptions made.

2. **Interest Rate Impact and Affordability (John Healy, Northcoast Research Partners, LLC)**: Inquiries on how interest rate changes might affect consumer affordability and Carvana’s growth.
- **Management’s Response**: Lower interest rates generally favor business by making cars more affordable. However, the company is well positioned to maintain profitability even in varied rate scenarios due to its efficient business model that benefits directly from the spread between wholesale and retail markets.

3. **Same-Day Shipping's Conversion Impact (Ron Josey, Citi)**: Curiosity about the conversion rate benefit seen from same-day shipping implementation.
- **Management’s Response**: While specific metrics were not disclosed, management affirmed that speed indeed drives conversion rate improvements, with same-day delivery being received positively by customers. This capability is seen as a significant competitive edge that could potentially be leveraged more extensively for growth.

## Outlook and Guidance:
Carvana expects the Q1 2024 adjusted EBITDA significantly above $100 million, attributing this confidence to the quarter’s performance so far and the non-reliance on material one-time benefits or costs. For FY 2024, the company projects growth

Key Questions to follow

Given the thematic emphasis on 'Autonomous', 'E-commerce', 'Investing', 'Driving', 'Thematic' in relation to Carvana Co (CVNA), and the insights drawn from the Morgan Stanley research report, here are three insightful questions to consider regarding the company's potential for future growth:

1. **E-commerce and Autonomous Driving Synergies:** With Carvana's foundation in e-commerce and the burgeoning interest in autonomous driving technologies, how could the company leverage its online platform and operational efficiencies to integrate or support autonomous vehicle sales or services? Could such an integration enhance Carvana’s long-term value proposition, especially within the shifting paradigms of car ownership and the potential for self-driving cars to transform the automotive marketplace?

2. **Investing in Technology for Scalability:** As Carvana continues its operational turnaround with notable EBITDA improvements and efforts to double its revenue while achieving higher EBITDA margins, what investments is Carvana making in technological advancements or proprietary platforms to ensure scalability and efficiency? How could these investments address valuation concerns by bolstering Carvana's market position relative to its peers and enhancing its customer offering in the used car market?

3. **Navigating Market Valuation and Financial Leverage Challenges:** Given the cautious optimism about Carvana's short-term growth prospects but ongoing concerns regarding its market valuation and the management of its financial leverage, what strategic moves or operational improvements can Carvana undertake to reassure investors of its long-term viability? Specifically, how can Carvana optimize its inventory valuation and manage its substantial debt in a way that aligns with its growth trajectory and mitigates share price volatility?

These questions not only touch upon Carvana’s core business model and its thematic investment potential but also dive deeper into strategic considerations that could shape its future success in a rapidly evolving automotive and e-commerce landscape.

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