| |  | TOGETHER WITH |  | | Good Sunday morning. We have a very spicy deep dive on tap today. But before we get to it, let us introduce today’s partner: Linqto. Linqto is a revolutionary platform with a delightfully clear mission: help accredited investors identify, evaluate, and invest in the world’s leading startups. Simple as that. Take a quick look at WHOOP, a wearable technology company favored by athletes like Michael Phelps and LeBron James. There’s Zipline, which runs a drone delivery network. Or Ripple, an innovative fintech transforming the way payments are settled across the globe (giving banking executives sleepless nights in the process). What do they have in common? With Linqto, you have front row access to them all. It’s a truly unique platform where you, the investor, are in complete control to browse and analyze at your leisure. Just as it should be. Sign up for Linqto now and find your Unicorn. | |  | Carvana’s Car Troubles, Explained In Silicon Valley, disruption is the name of the game. Uber and Lyft once disrupted the taxicab industry. Robinhood disrupted day trading. Fintech companies have disrupted banking, forcing traditional banks to spend tens of billions to keep up. Before turning the retail industry on its head, Amazon started out as a disruptor of book sales. It’s a simple playbook: enter an industry, introduce new technologies that eliminate the most cumbersome and unpleasant steps in the consumer experience, and turn that into rapid growth and scale — or die trying. Today, we will unpack the story of Carvana, the ten-year-old company with its eyes set on a particularly antiquated industry: used cars. For all its unsavory flavors — from sleazy salesmen to checkered vehicle histories to, worst of all, those wacky inflatable dancers flailing about in used car lots — hardly any industry was ever in such dire need of a rebuild. That’s exactly why Carvana, the internet’s premier used-car dealer, had ballooned to a $62 billion publicly-traded company. Yet like all balloons, there is always a risk of doing too much, too quickly. As investors rethink their possibly irrational exuberance about disruptive tech, Carvana has become the poster child of a pandemic hero turned 2022 lemon. With the stage set, let’s buckle up and get into it. Put it in Reverse Founded in 2012, in Tempe, Arizona, Carvana had an exceedingly simple premise: bring the convenience and simplicity of the Amazon.com experience to the truly massive automotive sector (auto sales represent one-fifth of all US retail activity). Carvana built e-commerce technology to make the process of vehicle selection, financing, purchasing, and scheduling a delivery a ten-minute process — not much longer than picking out a pair of slacks. The company opened its first flagship car vending machine in 2013 and listed on the New York Stock Exchange in 2017. But it wasn’t until 2020 that the business truly took off. Twin market forces, both byproducts of the Covid pandemic, were like nitrous oxide in the company’s engine. |  | First: As lockdown restrictions pushed more and more of everyday life online, consumers grew increasingly comfortable with making a major purchase — like, say, a car — from the comfort of their home. Second: Suddenly, a whole new cohort of people didn’t just want a car, they needed a car. Their lives depended on it — literally. With Covid-treatment best practices still a mystery to the medical world, the close confines of trains and buses became something to avoid like the — well, we were all there… For commuters whose work couldn’t be performed just as effectively from the couch, a new car (or, rather, a new used car) became all the more valuable. Through 2021, Carvana’s business, and stock, shot up to dizzying heights: - Total retail units sold topped 425,000, a 74% year-over-year increase, according to the company, while revenue surpassed $12 billion, up 129%.
- In 2019, Carvana sold just 20% of the number of cars as industry juggernaut CarMax. By 2021, that number had soared to ~50%.
- Carvana opened 2020 with its stock hovering around $80. By August 2021, its share price had more than quadrupled to north of $360.
Since that peak, however, the business has shifted back to first gear. On top of valuation concerns, the company is grappling with both cash flow and balance sheet issues just as investors reassess their preference for “growth at all costs.” Carvana’s stock price has plummeted by over 90%, to around $34 as of market close Friday. Loaners So what’s happening under the hood? For starters, disruption is easier theorized than realized. Once you create an easier and more accessible user experience, the race is on to 1) achieve mass scale and head off second-movers before they become usurpers (think Facebook vs. MySpace) and 2) pivot toward profitability. |  | Carvana nailed the first step. It’s the fastest automotive retailer to sell one million cars online, per company figures. But it’s the second, all-too-important step that’s given speedy Carvana headaches. As it turns out, the logistics of acquiring, managing, and selling millions of used cars is more challenging — and more expensive — than writing a few million lines of code. Scouting auctions for vehicles, outbidding experienced mom-and-pop retailers, transporting and servicing cars in need of repairs, and, crucially, holding cars on the balance sheet is a cash-intensive proposition. Indeed, used vehicles do not scale quite as easily as TikTok posts. - Since the beginning of 2018, Carvana has cumulatively lost more than $1.2 billion.
- Last year, Carvana management said it spent $4,700 on sales and administrative expenses for every vehicle sold — a metric the company acknowledges will be key to eventual profitability.
Balance Sheet Woes: On top of challenged microeconomics, Carvana is battling the same macro conditions as the rest of us: supply chain shortages mean fewer available cars and a worse consumer experience. Rising interest rates and gas prices translate to tepid consumer demand. Add it all up, and Carvana reported a drop in Q1 vehicle sales, down 7,800 to 105,000 for the quarter. David Binns, an analyst at S&P Global Ratings, told the WSJ, “The long-term sustainability of the business is still a question mark.” |  | Looking Forward Where does the car market environment leave Carvana today? Let’s take an inventory. Earlier this month, the company announced widespread cost-cutting measures. Roughly 12% of its staff, or 2,500 employees, are being laid off. Executives aren’t receiving a salary for the rest of the year to make up for all the resulting severance payouts. Carvana also had its car selling license revoked in Illinois earlier this month, after the state launched an investigation into widespread consumer complaints that the firm failed to properly transfer vehicle titles after sale and misused out-of-state temporary registration permits. Carvana has faced sanctions or been threatened with the same in North Carolina, Florida, and Michigan over similar claims, putting chunks of its business in jeopardy. Meanwhile, analysts remain split on Carvana’s potential post its feverish cost-cutting. “We do not necessarily see the company’s business model as highly superior or disruptive to the market,” JPMorgan’s Rajat Gupta wrote, “with well-capitalized brick-and-mortar dealers finding ways to grow and generate solid returns in an increasingly competitive environment.” Lessons Learned: Whether the future is bright for Carvana is somewhat in the eye of the beholder. One insider is betting on a comeback: Former US Vice President Dan Quayle, a member of Carvana’s board, bought over $700,000 worth of shares earlier this month. Another one of Carvana's longtime fans, Wells Fargo analyst Zachary Fadem, downgraded the stock to hold earlier this month while reaffirming his bullishness on the company's long-term outlook. Fadem predicted Carvana could become the most profitable used-car retailer in the country once it produces positive cash flow in 2024. So, will Carvana end up more like the Amazon of used books or the WeWork of office space? Analysts estimate the business will need run-rate unit sales of 1+ million in order to become profitable. That’s a whole lot of jalopies. ***** Want To Invest In Unicorns? We don’t blame you: - They’re worth over $1 billion
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- We just know those horns would make a killing on eBay if we could get our hands on one.
Okay, obligatory unicorn joke out of the way. Now let’s get serious: Linqto is evening the private market playing field for everyday investors like you and I. How? By giving the rest of us access to an asset class that only 2% of the world’s accredited investors have access to: Unicorns. From successful IPOs like Coinbase and Robinhood, to future success stories like WHOOP and BlockFi, Linqto lets us get in on the massive potential upside that comes with investing in billion-dollar private companies before they go public. With over $126M invested through the platform to date and a track record that would make even the most bearish investor blush, Linqto isn’t just offering us a new investment – they’re democratizing the private investment industry. Grab $10,000 and get started investing right here. | | | | | | Written by Brian Boyle. | | No longer want to receive these emails? Unsubscribe here. Copyright © 2022 The Daily Upside, LLC., All rights reserved. 1230 York Avenue, Box 154, New York, NY 10065 | | | | |
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