Carvana Soars 3,000%, Founders Gain $11B Amid Q1 Surprise

Key Takeaway

• Carvana's stock soared over 3,000%, enriching founders by $11 billion after reporting a strong Q1 with $3.1 billion revenue.
• The company reversed expectations, posting a $49 million net income versus an anticipated $116 million loss.
• Despite challenges, upgrades from JPMorgan and improved earnings estimates from William Blair signal growing analyst optimism.

Remarkable Turnaround

The fortunes of Carvana Co., an online used-car dealer based in Phoenix, have seen a dramatic reversal, with shares soaring more than 3,000% from historic lows. This resurgence has significantly boosted the net worth of the company's founders, Ernie Garcia II and Ernie Garcia III, by over $11 billion since December 2022. The stock's remarkable recovery was highlighted by a 34% jump on Thursday, reaching its highest point in over two years, following the announcement of stronger-than-expected first-quarter earnings and revenue that exceeded analysts' forecasts.

Ernie Garcia III, Carvana's CEO, reflected on the company's journey, stating, "2022 and 2023 were a tough run for us," during an interview on Bloomberg TV. He credited the team's cohesion and response to adversity as key factors in achieving what he described as "undoubtedly the best quarter we've had in our history."

Financial Resurgence

Carvana's financial performance in the first quarter of 2024 marked a significant milestone, with vehicle sales growing for the first time in six quarters and pushing revenue to $3.1 billion. This growth comes after a period of strategic restructuring, including cutbacks on advertising spending and vehicle inventory to manage costs amid rising interest rates and mounting debt. The company reported net income of $49 million, a stark contrast to analyst expectations of a $116 million loss, partly aided by a $75 million gain from warrants held in insurer Root Inc.

Despite these gains, Carvana still faces substantial challenges, including a debt load exceeding $6 billion and increased interest payments on restructured loans. However, the company's leadership remains optimistic, with plans for continued sales growth and further improvements in EBITDA.

Market Reaction and Analyst Perspectives

The surge in Carvana's stock has inflicted significant losses on short sellers, totaling $3.9 billion, according to S3 Partners LLC. This turnaround has prompted a reevaluation among analysts, with JPMorgan upgrading Carvana to overweight from neutral and setting a price target of $130, up from $70. Analysts at William Blair have also adjusted their 2024 adjusted earnings estimate upwards by more than 60% to nearly $1 billion, anticipating profitability to more than triple between 2023 and 2025.

Despite the stock's impressive rally, Wall Street remains cautious, with Carvana holding only four buy ratings, 17 holds, and three sells. The average analyst price target suggests a potential downside, indicating that while the company's recent performance has been strong, there are still concerns about its long-term prospects.

Management Quotes

• Ernie Garcia III, CEO of Carvana:

  "2022 and 2023 were a tough run for us. When we went through that period, the team came together, we responded incredibly well and I think this quarter is undoubtedly the best quarter we’ve had in our history."