Deep Dive: Under the Hood of Carvana's 100X Rally

Welcome back to The Rundown for another weekend deep dive. Today, we are talking about one of the biggest comeback stories ever in the stock market, Carvana. Just two and a half years ago, Carvana stock was trading under $4 a share with Wall Street betting the company would go bankrupt. Today, the stock is trading near $400. So in today's episode, we're going to break down Carvana's wild ride from pandemic darling to near bankruptcy and how they turned things around to become one of the hottest stocks in the world again. We'll also tell you why some on Wall Street are betting against the company and calling it a house of cards built on shady accounting. We got a great one for you today. Let's go. Carvana might be on the verge of pulling off the greatest comeback in the history of the stock market. Now, before we get into that, let's first talk a bit about the company's history. Carvana is a pretty young company. It was founded back in 2012. Carvana was one of the first platforms to let people buy and sell used cars entirely online. No dealerships, no pushy salesmen, no let me check with my manager routine that I'm pretty sure everyone in America hates when it When it comes to buying a car. They made it super simple and convenient. You tap a few buttons on your phone and you can have the car delivered to your home. And that proved to be a pretty popular concept. Carvana also built those iconic glass car vending machines all over the country, right off of major highways that caught people's attention too. The business was finding traction in the 2010s and they went public by 2017 and debuted at $15 a share. Then we fast forward to 2020. That's when things got wild. The pandemic hits, car dealerships are shut down. And Carvana's business and stock price both take off. See, people were stuck at home. So suddenly having the option to buy a car online and having it delivered to you or having the option to pick it up from a giant glass vending machine didn't sound so crazy. In fact, for some people, it was the only option to buy a car. So the pandemic served as a massive boost to Carvana's business. And Carvana's stock price hit all-time highs of $360 per share by August of 2021. It was a 300% jump from the start of 2020. But then just one year later, the wheels came off. No pun intended. By the end of 2022, Carvana's stock had lost 97% of its value, dropping under $4 a share. And there were multiple reasons for this. First off, the used car market cooled off. See, during the pandemic, there was a shortage of new cars, which pushed people to buying used cars. But once supply chains normalized and car production picked back up, used car prices started to fall. That was a hit to Carvana's business and profitability. Then came the Fed. They started raising interest rates in 2022, and that made car loans more expensive, and that crushed affordability. So all of that led to Carvana's business taking a significant hit. And then to make matters worse, Carvana made some mistakes along the way. They took on a significant amount of debt to finance their growth in 2020 and 2021, including buying a car auction company, ADESA, for over $2 billion. So as car sales slowed down and the company's financial performance got worse, Investors became concerned about Carvana's ability to pay back their debt obligation. And that's what led to their stock price dropping 97% in a single year. And Carvana wasn't the only company experiencing that kind of drawdown. Other companies that were pandemic darlings like Peloton and Zoom also saw their stock price take a huge hit. But unlike Peloton and Zoom, which have never really recovered from their pandemic highs, Carvana has made a full comeback. In fact, their stock hit all-time highs this past week for the first time since 2021. So what did they do to pull this off? Well, let's talk about it. Carvana's remarkable turnaround comes down to two things, a massive debt restructuring and relentless focus on profitability. When Carvana was staring down bankruptcy in late 2022, the company was drowning in over $7 billion of debt with interest payments that were bleeding them dry. But then they had a major breakthrough in July of 2023. They were able to restructure their debt with their debt holders that pushed back their debt maturities and cut their immediate interest payments by over $400 million a year. That was huge because it bought them time to then turn around the company. Once the debt crisis was temporarily averted, Carvana started becoming laser focused on profitability. They implemented significant cost cutting measures, including layoffs. Which reduced their annual expenses by over a billion dollars. And they started making smarter decisions about inventory, logistics, and vehicle sourcing. And as they tightened their operations, their unit economics improved. And even the Odessa auction house acquisition that everyone was clowning them for back in 2022. They started using those auction locations to store and recondition vehicles. Closer to the customers that ended up reducing outbound shipping distances by 10 percent, which improved their margins. In fact, Carvana is leaning into this. In this past quarter, they integrated four additional Odessa locations. And all of these changes and improvements is starting to show up in one key metric for the company, GPU. So let's talk more about that. Now, when most people think of GPU, they're usually thinking about graphics cards from Nvidia or AMD. But in the car business, GPU stands for gross profit per unit. This number tells you how much money Carvana makes on each vehicle they sell. So let's dig into that number because it's crucial to their business. This chart right here tells you a clear story on how much Carvana has improved their profitability. Back in Q1 of 2023, Carvana was barely scraping by, earning about $1,400 in retail GPU. This was during a time period where used car prices were falling and they had way too much inventory. But over the next two years, they clawed their way back. And by Q2 of 2025, this past quarter, Carvana's retail GPU has more than doubled. To about $3,600 per car sold. That's a record high for the company. So all the operational improvements the company made in 2023 and 2024 are starting to pay off. And the numbers show it. The company has better pricing discipline, smarter inventory sourcing, more efficient reconditioning. And of course, it probably helps that the used car market has stabilized compared to 2023. As Carvana sells more cars and improves their efficiency and reaches scale, their retail GPU should continue to go up. Resulting in more profits for the company. But the retail GPU only tells a part of the story. See, Carvana also makes money from wholesale auctions where they flip trade-ins or offload cars that don't meet retail standards. And then the real moneymaker for the company is finance and warranty products. So let's talk more about that and why it's kind of controversial. Now, this may come as a surprise to a lot of people, but Carvana doesn't make most of their profits from selling the actual cars. The majority of their profits come from financial services around the sale of the cars. In fact, you can make the case that Carvana isn't just an online car dealership anymore. They're essentially a financial services company that happens to sell cars. Let's break down how Carvana makes money today. Let's start with the basics first. Carvana buys a used car from somebody at a set price, say $10,000. They, you know, they recondition the car, clean it up and then sell it at a higher price on their platform, say maybe $15,000. So in this example, the retail GPU, the gross profit unit would be $5,000. They paid $10,000 for the car. They sold it for $15,000. That's $5,000 in profit. But that's just the tip of the iceberg when it comes to Carvana's business. When someone buys a car from Carvana, They usually take out a loan and that's where the real money printer is. See, Carvana often originates the loans directly, and they do this for thousands of customers that buy cars off their platform. But here's how they're different from other car dealerships. Instead of holding on to these loans and collecting interest payments over time, Carvana bundles these car loans and sells them to investors or their financial partners like Ally Financial. And this is a key point here, because Carvana can then capture the entire value of the loan sale. Upfront and recognize that profit immediately rather than over the life of the loan and those loan sales make up nearly 90% of Carvana's total profits. It's not the car sales themselves. It's the loan sale. Like for example, in the second quarter of this year, Carvana said that loan sales accounted for $274 million of its $308 million in profit, but it doesn't stop there. Carvana also sells extended warranties, insurance products and other financial services. So essentially each car sale on Carvana's platform has become an opportunity for them to sell multiple high margin financial products. But this is starting to raise some red flags on Wall Street. So let's get into that. Carvana has some haters. Not everyone is buying into this comeback story. In fact, there's some pretty sophisticated investors that think this whole turnaround is smoke and mirrors. The main concern has to do with Carvana's accounting method. Many short sellers like Jim Chanos and even Hindenburg Research have accused Carvana of doing shady accounting. That company is Carvana. which has gone up 100x, the street believes it's an epic turnaround and we've been pointing out that in fact the company is still losing money x gain on sale of loans. It's selling subprime loans to both affiliates and non-affiliates and booking big gains on that. Like I mentioned earlier, Carvana bundles their car loans and sells them to third parties and immediately books the entire estimated profit. From the loan, the second it's sold. And this is a bit different from typical car dealers who might hold on to the loan and recognize the revenue over time as the loan payments come in. But what Carvana is doing is pulling forward those future earnings, assuming that people will continue to pay their loans. And this accounting method makes Carvana's current profitability look better than it actually might be. Like I mentioned earlier, 90% of Carvana's profits come from these loan sales. But if a recession was to hit and people start defaulting on their car loans at a higher rate than predicted, then those upfront profits could turn into future losses. Short sellers argue that what Carvana is doing is like a movie studio counting all the money that a movie is going to make on opening night and just assume the movie was going to be a blockbuster hit. But the accounting concerns around Carvana brought up by these short sellers don't seem to be resonating with the market. And it seems like the short sellers might be giving up. You know, Carvana used to be one of One of the most shorted stocks on the market. But these days, short interest is less than 10% of their float. It seems like the bulls are firmly in the driver's seat when it comes to Carvana. So let's talk about some of the upside that the bullish investors see. Carvana is coming off a record-breaking earnings report where they reported record numbers of sales and record profits. And their stock is hitting all-time highs. According to their latest earnings report, Carvana sold 143,000 retail units, which is up 41% from a year ago. The company is seeing solid growth right now, and Carvana's CEO thinks they're just getting started. His goal for the company is to sell 3 million cars per year within the next five to 10 years. Just to give you some context here, Carvana sold 416,000 cars in 2024. So they would need to more than 10X that number to reach their target. It's a pretty ambitious goal, but Carvana says they have a lot of room for growth. Because despite the hype and name brand around the company, Carvana still only has about 1.5% of the US used car market and just 1% of the total car market. And even when it comes to e-commerce, like e-commerce has taken over every other retail category, but only 2% of car sales currently happen online. So Carvana sees all of that as massive opportunity for growth. And if we want to get real crazy with it, a wild card for future growth. Might be robo-taxis and autonomous vehicles. Just a few days ago, the car rental company Avis announced a partnership with Waymo to launch and scale fully autonomous ride-hailing service in Dallas. Avis' role in this will be to manage the fleet of robo-cars and do things like maintenance and cleaning. And that could be a business that Carvana eventually gets into themselves. They're experts in managing a fleet of cars and they're getting more efficient at it. In fact, the Wall Street analysts even asked Carvana's CEO during the earnings call last week if there was any plans for the company to get into managing robo-taxis. The CEO, Ernie Garcia, kind of dodged the question and said that the company wasn't currently focused on it, but if self-driving cars become as big as everyone predicts they're going to be, it could be a potential area of growth for Carvana. So what's the takeaway here? Well, Carvana has pulled off one of the greatest corporate turnarounds in history, and the stock has become a hundred bagger in less than three years. But behind this comeback lies a company that still faces serious questions. Their accounting practices have raised red flags on Wall Street, and their entire profit engine depends on people taking out loans. And with the economy starting to show signs of weakness where interest rates are still high and defaults are creeping up, the company could face more challenges again. But it's also easy to see why many people are bullish on this company. They're just scratching the surface when it comes to dominating the used car market. And one thing is for sure, when it comes to Carvana, they now have a proven track record that they can execute when their backs are against the wall. Well, all right, guys, that's it for today's Weekend Deep Dive. Hope you guys enjoyed that one. If you did and you have like eight extra seconds, consider giving us a five-star rating on Apple, Spotify, wherever you listen to your podcasts. And if you are listening on Spotify or YouTube, drop us a comment and let us know what your thoughts are on Carvana. And let us know what topics you want us to cover in future Deep Dive episodes. Thank you guys so much for listening and watching. Shout out to Mike and Connor for all the help behind the scenes. And we'll see you guys back here on Monday.