Once in a while, you come across a company that defies all expectations. Carvana is one of those companies. After its 2017 IPO, the stock rose 31x in four years, only to crash 99% in 2022-23.
Most investors wrote off the company.
But Carvana came back from the edge of bankruptcy and is now up a mind-numbing 10,961% in barely two years. The cherry on top? It just got added to the S&P 500.
When was the last time you heard of a company that was teetering on the edge of bankruptcy, pulled off a turnaround, and then made it into the S&P 500 — all in two years?
Here’s the Carvana turnaround story!
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Business Overview
To understand the rapid rise, fall, and eventual rebound, we must first understand what the company does.
Simply put, Carvana (NYSE: CVNA) is the Amazon of used cars.
Customers can browse vehicles on the website, obtain financing and insurance, and then either receive home delivery or pick up their vehicle from one of Carvana’s trademark glass “vending machine” towers.
The U.S. used-car market is one of the largest retail segments in the country, but has been defined by extreme geographic fragmentation. Traditionally, used-car markets were highly local, with limited inventory and opaque pricing.
Carvana (founded in 2012) sought to disrupt this market by:
Providing a national inventory by centralizing inventory digitally, allowing a customer in Ohio to purchase a vehicle physically located in Georgia. Just as with Amazon, this unlocked a long tail of inventory selection that no local dealer could match.
Integrating finance and insurance directly into the checkout flow. (Most customers don’t know this, but sometimes the margins here exceed what they make from selling the car — For example, in 2023, Carvana made $2,407 per car sold from finance & insurance compared to $2,385 from the car itself)
Finally, instead of relying on third-party auctions and shipping, the company invested billions in building a proprietary logistics network.
The Rapid Rise (2020 to 2021)
While the company did exceptionally well 3 years into the IPO (up 900%), the Covid crash decimated its stock price, and the company went through a brutal 75% drawdown in just one month (Feb 2020 to March 2020).
But as with so many other companies, the pandemic proved a perfect tailwind:
As lockdowns ramped up, the traditional dealership model predicated on in-person negotiations and test drives became a public health liability. Meanwhile, Carvana had already mastered the end-to-end online used-car purchase process.
The global semiconductor shortage and rising demand for personal transportation led to an unprecedented appreciation in the value of used vehicles. To put things in perspective, the consumer price index for used cars and trucks jumped up by 40.5% from January 2021 to January 2022.
All this meant that the thousands of cars on Carvana’s balance sheet became more valuable, and the company could sell them at inflated margins. The stock price exploded — rising 10x in just 18 months, and Carvana became one of the fastest companies in history to join the Fortune 500.
99% Drawdown (2021 to 2022)
The problem with betting on hyper-growth during a macroeconomic boom is that it can be a double-edged sword. And that’s precisely what happened with Carvana.
As the Fed aggressively hiked interest rates, the monthly payments for used vehicles skyrocketed. A consumer who could afford a $25,000 car at 4% interest could suddenly only afford a $18,000 car at 9% interest. Rising inflation also meant that consumers had reduced discretionary income. For the first time in its history as a public company, Carvana reported a decline in sales volume in Q3 2022.
Remember how used cars appreciated in 2021? Well, that stopped, and the used car prices began to fall. Carvana, holding billions in inventory purchased at peak prices, faced massive write-downs.
To add fuel to the fire, while the macro environment was deteriorating, Carvana acquired ADESA U.S. physical auction business for $2.2 billion. The market viewed the deal as suicidal as the total debt load of the company rose to $9 billion!
By the end of 2022, the stock was down 99%, and the market was pricing the company at a bankruptcy valuation. The company had $5.7 billion in unsecured debt, with the first major tranche maturing in 2 years. Given negative free cash flow, Carvana was expected to run out of cash before it could repay the principal.
The company, which was worth $60B at its peak, was now barely valued at $1B.
The 100x comeback (2023 —)
The single most critical event in the Carvana turnaround occurred in July 2023, when the management negotiated a deal with the company’s creditors. Apollo Global Management led the deal, and the creditors exchanged their unsecured debt for new senior-secured debt secured by Carvana’s assets (real estate and inventory).
The deal bought Carvana time. Instead of starting to pay the loan in 2025, the new deal pushed maturities to 2028 and eliminated the immediate threat of insolvency. With this, the risk of Chapter 11 bankruptcy was gone.
CEO Ernie Garcia III launched a new directive: “The Three-Step Plan.”
Drive Positive Adjusted EBITDA: Profitability was now the only metric that mattered.
Drive Significant Unit Economics: Expand Gross Profit Per Unit (GPU) to record levels.
Return to Growth: Only after the first two were achieved.
To their credit, management followed through: up to 20% of the workforce was let go, the company stopped buying cars aggressively, and it successfully reduced selling and administrative expenses.
Just 6 months after the stock hit its low, the company reported Adjusted EBITDA of $155 million, exceeding expectations for continued losses. The stock price rose 41% in pre-market following its earnings report.
The company continued to execute well in 2024 & 2025.
Carvana ramped up buying directly from consumers as it eliminated auction fees and yielded better margins than buying from wholesalers. The ADESA acquisition that everyone criticized turned out to be a boon as the company could sell the cars that didn’t meet their standards for reselling via ADESA auctions.
Remember how we discussed that Carvana was making more money in finance than from selling cars? They continued to ramp up here, and now, even in the high-interest-rate environment, Carvana has maintained strong spreads. This is a high-margin business that can help buffer against fluctuations in used-car prices.
Just as with Rolls-Royce and Meta, the rebound occurred due to a string of positive catalysts.
Should you buy?
The idea behind Rebound Capital is to invest in high-quality companies in a drawdown. To be frank, Carvana would have never cleared the Quality filter in our QGV framework.
While we are happy to cheer from the sidelines, here are some risks you should consider before investing in the company.
The company has a history of massive insider selling. During the last run-up, Carvana CEO Ernie Garcia III’s father, Ernest Garcia II, sold $3.6 billion in stock between August 2020 and August 2021. He sold another $1.4 billion in stock in 2024 alone. For full transparency, this might be just profit booking as they did buy back some shares ($400M+) during the 2022 drawdown.
Short-seller Hindenburg Research has alleged that Carvana is a “father-son grift,” accusing the company of using gain-on-sale loan accounting to artificially inflate profitability. They contend that Carvana sells risky subprime loans to undisclosed partners to book immediate revenue, masking the long-term credit risk.
The CEO’s father owns DriveTime, a separate used-car dealer. Carvana has historically engaged in complex transactions with DriveTime (including inventory sharing, logistics, and office space), creating a permanent conflict of interest. The CEO’s father had previously pleaded guilty to felony bank fraud1 on allegations that he helped a company report fictitious income through sham transactions.
Overall, with the company trading at a P/E ratio of 104 and the hype at an all-time high following the S&P 500 inclusion, we don’t see much short-term upside for the stock.
Talking about quality companies in drawdown, Ferrari is now in its worst drawdown in the last 3 years and is down 27% from its ATH. We will be digging into the company this month to see if it’s a good rebound candidate.
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We would love to hear what you think.