We remain short shares of Carvana (CVNA), a poorly capitalized, growth challenged, auto retailer now valued at an absurd $19 billion (42x EV/2024E EBITDA) following last Friday’s 30%+ pop in share price. Prior to this move Carvana’s valuation was already stretched – now, its share price is so ridiculous that it doesn’t just trade at levels unheard of for an auto dealer, it trades at a premium to leading tech companies. Carvana does not have a brighter path to profitable growth than CarMax, let alone Microsoft. While tech peers drive an exciting revolution in AI, Carvana shareholders are at risk of being run over to help pay down billions in high yield debt with 14% PIK interest.

Throughout 2023 Carvana management focused on improving profitability to stave off a looming balance sheet crisis. Shares have long since transitioned from trading as a distressed equity to pricing in a return to meaningful growth (at $50 prior to earnings, Carvana had a $10bn market cap). This renders market exuberance over Carvana’s fundamentally mixed 4Q23 results all the more inexplicable. Carvana reported a miss across major metrics in 4Q and called for only “slight” unit growth in 1Q24. This was all excused by the market in favor of 1Q24 guidance for better-than-expected EBITDA – a move we find problematic as by our estimation, Carvana’s stock discounts not just improving profitability, but a substantial acceleration in unit volume. We estimate that not only does EBITDA per unit need to double, but vehicle sales and revenue must grow at an unrealistic 18% CAGR for 7 years just to arrive at the current stock price. Contrary to the stark re-rating in Carvana’s shares, consensus revenue estimates coming out of the print actually fell post earnings.

In addition to the disappointing growth outlook, there are signs that further improvement in unit economics is nearing an end. Having reached levels consistent with CarMax, gross profit per retail unit has plateaued over the last 3 quarters. This is a noteworthy development not only because gains in this metric have served as a key catalyst for shares, but because it highlights how unremarkable Carvana’s unit economics are when compared to true industry leaders. Carvana has had to work tirelessly over the past two years to simply match the same levels CarMax has consistently achieved for years.

With growth forestalled and unit economics no longer a source of meaningful upside, investors should finally awaken to the glaring fact that Carvana is not a disruptive technology company. As told to us by former Carvana executives, the company is “just a dealership.” Consequently, if Carvana wants to grow without sacrificing its hard-earned improvement in profitability, it must grow responsibly like any other dealership, particularly given its exposure to subprime consumers and the need to manage a still severely over-levered balance sheet.

As profitability strides inevitably lose their appeal and the constraints on Carvana’s business are laid bare, so too will the vulnerability of Carvana’s current valuation. At present levels, Carvana’s enterprise value is a staggering 40% greater than CarMax’s despite selling half the number of retail units and having no demonstrable advantage in terms of margins, market share, or capital allocation. We believe Carvana shares should at the very least converge to trade at multiples broadly in line with CarMax. Applying a 12x multiple to our estimated 2026E EBITDA, we arrive at a price target of $16 (-77%).