Carvana (CVNA)- The Paper Profit Turnaround
Investors should be questioning the sustainability of recent profit growth
CVNA has turned profitable in recent quarters; however, non-cash income related to gains booked on the sale of finance receivables is a big reason. The company reported EPS of $1.53 in Q1'25, but the non-cash gain on sale was $1.91. CVNA primarily touts its EBITDA and EBITDA margin and is predicting another 200 bps of margin gain for 2025. It does not remove the non-cash gain from EBITDA, which was 56% of Q1's figure. Selling ancillary products such as insurance and service contracts for car repairs generates much of CVNA's EBITDA and revenue. The commissions on those are more profitable than selling cars.
The company enjoyed strong growth in 2023 and 2024 while at the same time cutting overhead costs. There is still some operating leverage coming there, but the costs are not falling much, and the profit per car sold is falling.
There are several related party transactions to keep an eye on. We don't care as much about renting office space from the majority owners. However, the owners also have a private company, DriveTime, which competes with Carvana in buying and selling cars and shares some of CVNA's technology. It also does CVNA's car reconditioning work and administers the service contracts that CVNA sells.
Looking behind the numbers, we see several risks related to the company's operating model and recent sources of profit growth that investors should be aware of before jumping on board with the turnaround story.