Carvana 1Q23: Company Comment

We look at CVNA 1Q23 results and still see rolling negative EBITDA and a massive shortfall from interest expense as the main event.

"High unit margins Ma! Top of the world!"

• CVNA sees losses reduced materially and unit margins rise while management offers hope for a positive EBITDA quarter in 2Q23.

• The negative EBITDA still comes before over $600 million in annualized interest expense lurking as the other reality.

• In a surreal Q&A session, we found it odd that discussions of debt on the call were minimal with SG&A clarity the focal point.

The key for a high-risk name such as Carvana is to get in a comfort zone on CVNA’s ability to sustain enough liquidity outside a restructuring and to frame the asset protection that will be sufficient to plug the gaping negative cash flow hole after cash interest expense. There is the usual question of whether the company can possibly generate a numerically defensible equity value at the EBITDA run rate it might be able to post. Then the trick is framing what a theoretical Enterprise Value might look like at the assumed multiples (and in what year) and estimate if that EBITDA multiple can even cover its debt.

For now, the LTM EBITDA through 1Q23 of $ -717 million is a rough starting point. The negative EBITDA in 1Q23 falls short of quarterly interest by $183 million, so the bullish sensibilities need more of a catalyst than record unit used car margins that come after a period with material inventory valuation allowances and more than a little noise in framing the expense structure. That EBITDA vs. interest shortfall is a big gap to close let alone gauging the prospects for free cash flow for debt reduction or investment.  

The EV/EBITDA multiple one would award to a highly leveraged online retailer in the latter part of 2023 would presumably be much lower than the 12x to 15x area that was being discussed back in 2020.  Is the right number 8x EBITDA? 10x? We would argue 8x is a high case. And what EBITDA number is it that gets you there for a company with almost $8.0 bn in net debt? And when will you hit that mark?

We respect the rise in unit margins for used cars, but those prices need to be high and procurement costs low to put a dent in the EBITDA shortfall. The excitement around the unit margins deflect from the simple reality that sales volume in units was down sharply YoY. The company needs price and volume to soar and unit costs to be low. That is tough math. That gets to the simple reality that CVNA needs much less debt, and that is not going to be addressed by a coercive exchange with the Doomsday Defense (Apollo, PIMCO, et. al) lined up against you.

We already detailed our views on how the CVNA risk profile has been playing out and what structural issues are at work in CVNA (see Carvana: Prisoner’s Dilemma, Used Car Getaway 3-22-23, Carvana: Credit Profile 3-5-23, Carvana: Wax Wheels 12-8-22). We also looked at the broader used car market dynamics (see Market Menagerie: The Used Car Microcosm 11-29-22).  The insider voting control makes some outcomes less likely and the battle to keep control is likely to preclude most logical outcomes for a while.

The 1Q23 conference call was short and the question section long with Q&A heavily focused on SG&A. Or maybe it just seemed that way as equity analysts work on their EPS models. The strange reality is a massive cash flow hemorrhage and unsustainable debt burden was not much of a topic of discussion other than the company indicating it preferred secured financing to support liquidity. Maybe the 40-handle on the unsecured bonds (those not targeted in the exchange) factored into that preference.