Carvana
The stock IPO'd in April 2017 at a price of $13.50 but from there, it went on one of the all-time bull runs as it gained over 2,650% until it topped out in August 2021. At its peak, the company had a valuation of nearly $80 billion.
In many ways, Carvana is the poster child of the last decade of tech and markets. VC-fueled businesses were able to grow fast and reach incredible valuations, as investors rewarded companies that spent to maximize growth and retain market share. Of course, this was due to a whole slew of companies that did successfully spend to grow market share and then were able to realize higher profits, validating this approach.
In theory, this can work as long as the cost of capital remains low. Of course, this is no longer the case as short-term interest rates have spiked higher over the past year which leads investors to value the stock's theoretical future cash flows less. Additionally, bull markets create environments of complacency and greed where questionable narratives become accepted and passed off as fact.
In Carvana's case and what we saw with many other tech and growth, stocks is that old-school businesses were given tech stock-like multiples. The reality is that Caravana is more of a used car dealer than a tech stock, so it should have a low multiple like most used car dealers. And, this could be an explanation of the recently bearish price action.
While many tech stocks can increase margins over time due to network effects and low marginal costs, Carvana is unlikely to be one of them. And, the company's business model during its growth phase was not sustainable as it was spending heavily to get people to list their used cars on the website, and it would also spend heavily to make these cars more appetizing to potential buyers.
This business model could be justified in low inflation, low-rate world, but it's not viable in today's higher rate, higher inflation world where investors are prioritizing cash flow, sustainability, and resilience.
