Yet Another Value Podcast - Recurve Capital's Aaron Chan on the scalability of Carvana's $CVNA business model

Episode Date: February 4, 2025

Aaron Chan, Founder and Managing Partner at Recurve Capital LLC, joins the podcast to discuss his thesis on Carvana Co. (NYSE: CVNA), the leading e-commerce platform for buying and selling used cars. For more information about Aaron Chan and Recurve Capital, please visit: https://recurvecap.com/ Carvana - Recurve’s Response to Hindenburg’s Short Attack (article): https://recurvecap.com/insights/carvana-recurves-response-to-hindenburgs-short-attack Chapters: [0:00] Introduction + Episode sponsor: Daloopa [1:20] What is Carvana and why are they so interesting to Aaron [5:00] What is Aaron seeing with $CVNA thesis that that the market is missing; differentiated view on CVNA [9:39] Why the volatility and addressing that fear; factors for the wild swings [16:49] Competitive analysis - why is no one copying the $CVNA model [22:44] How much of an advantage is the national level of $CVNA's exposure [26:47] Brand building / advertising [30:30] $CVNA economics [37:09] Why are so many short sellers attracted to $CVNA [52:18] What Aaron thinks would be the reason $CVNA thesis doesn't work 3-5 years from now; downside risks to thesis [57:05] Can $CVNA profitably serve rural places and discussion on valuation [1:03:50] Why isn't every used car dealer dead and final thoughts Today's sponsor: Daloopa Earnings season is hectic—there’s no way around it. But what if you could take back the time you spend on manual model updates? With Daloopa, you can. Daloopa automates your audit and update process, instantly pulling accurate, fundamental data from filings and reports directly into your models. That means no more wasting hours on repetitive tasks. Instead, you can focus on analyzing trends, refining strategies, and staying ahead of the competition. Stop letting manual work slow you down. Set up a free account today by visiting daloopa.com/YAV and see how Daloopa can transform your workflow.

This podcast is sponsored by Delupa. Earning season is hectic. There's no way around it. But what if you could take back the time you spend on manual model updates? With Delupa, you can. Delupa automate your audit and update process, instantly pulling accurate, fundamental data from filings and reports directly into your models. That means no more wasting hours on repetitive tasks.

Instead, you can focus on analyzing trends, refining strategies, and staying ahead of the competition. Stop letting manual work slow you down. Set up a free account today by visiting Delupa.com. slash yavie and see how and see how dilupa can transform your workflow that's the lupa d a l oopa dot com slash y a v all right hello and welcome to yet another value podcast i'm your host andrew walker if you like this podcast we mean a lot of you could rate subscribe review wherever you're watching or listening to it with me today i'm happy to have on for the first time erin chan is the cio at recurve capital erin how's it going very good thanks so much for having me

excited i'm really really excited to have you i thought we were going to I was going to have you on for another name I was researching last summer, but I'm super excited to talk this one. Before we start, get started, quick disclaimer, remind everyone, nothing on this podcast is investing in advice. Please consult a financial advisor, do your own work, all that type of jazz. The name we're going to talk about is kind of controversial on Finchwit, so people should keep that in mind as well. Aaron, the stock we want to talk about is Carbana. The ticker is CVNA. I'd be surprised if any listeners weren't at least a little bit familiar with it, but I'll just, let's hop into it.

What is Carvana and why is it so interesting? Well, Carvana is the largest e-commerce only used auto retailer in the country. They launched in 2012 by Ernie Garcia Jr. Kind of spun out of drive time, his dad's company. And it's unique in that it's kind of a fully vertically integrated retailer, which means it has finance operations, logistics operations, delivery operations, you know, all the reconditioning inspection work is done in-house. And, you know, that makes it a pretty interesting vertically integrated machine, which, you know, as an analyst, it elevates the complication and complexity of analyzing that business.

I think there's a lot of misconceptions about the company that arise from that vertical integration and the extent of it and comparing it versus others in the industry. but it's interesting because it's a, you know, scaled, scaled company. They've spent a lot of money building out this kind of custom-built architecture and infrastructure. You know, they have 1% market share in a large, stable, end market. And, you know, the kind of businesses I get drawn to are one, I call them disruptive companies and non-disruptive industries. So find a disruptor in a pretty sleepy industry where things have been done.

old school away for a long time and if someone's building something interesting and different and new that has a great business model attached that's an interesting place for me to be fishing and i think carvonda kind of ticks a lot of those boxes if not all of them um it's a sleepy old industry you know 40 000 plus use car dealers independent use car dealers out there everyone hates the experience my mother-in-law bought a car, a new car actually, like a few weeks ago, I took her five and a half hours. You know, it's just, it's a terrible, terrible. Your mother-in-law bought a new car, or used car, and she didn't go through Carvana?

No, she bought a new car. New car, okay, okay. I was going to say, stop the podcast, short everything. No, I know. You think I'd have some toy with the family. But, you know, she told, she was talking to the... the finance guy as she was going through the process and she's like, I thought you guys fixed this already.

Like, why is it still taking so long? He's like, nothing has changed. You just do this so infrequently. You don't, you forget how bad it is. I think this is, you know, the way I kind of think about it is, it's a little bit like Netflix and how disruptive the experience is from a user perspective. You can check, you can find a car. We can get into all the particulars of the workflow in the process,

but you can find a car, you can purchase it. and it'll show up at your door and the whole process in terms of like man hours that's required from the customer can be under an hour, right? It's 10 to 20 minutes to find a car, check out. It's another 10 to 20 minutes to receive the car. That's very disruptive in terms of like user experience

relative to what the rest of the industry does. The difference between it and Netflix is that you use Netflix every day and you buy a car every six years. So people forget how about it. days and they may not have the same kind of memory or bad memory about the experience. No, you hit on one of my questions I was going to ask later. I think that we'll come back. But let me start with the first question I like to ask every guest.

Look, the market is a really competitive place. Obviously, you've got a position here, so you think this position delivers risk-adjusted alpha. That requires a different view. What is your differentiated view on Carvana than kind of what the market is pricing in here? Yeah, the way I think about it is, yeah, so I kind of, it came into the name during the drawdown 21-22 drawdown so i don't i didn't have kind of a legacy position in this but um i had been studying it for years and just it hadn't kind of reached the critical

mass that i wanted it to to convince me that it was scalable and repeatable and you know the growth story would be really strong um i think after 22 there's i kind of think about it in a three phase exit or narrative change from that and i think we're in phase three. So phase one was it's not going bankrupt. You know, kind of a mispriced distress situation. That probably took the stock from around $4 to around $40. Can I just pause you for one second here? For those who aren't familiar with Carvana, in 2021, the stock is hitting 250 to 300 per share. And as Aaron's saying by late 2022, it's in like the throes of distress. The stock is in the single digits. I think short sellers are dancing on its graves and we'll probably talk short sellers or

something. But just so people have that like this is a high flyer that stumbles for a lot of different reasons. And I think Aaron's just saying like when he comes onto the stock on the stumbles that he mentioned $4. So just to give that background for people. Yeah. I wish my basis is up $4. But I think it bought in about $3.90. And I think there was a peak fear. The final, you know, the capital markets were freezing up and seizing up. The, you know, this is a business that requires a lot of capital market's activity just to cycle the capital as they originate loans and as they buy inventory and all these things and kind of keeping the machine running. So there was a lot of fear around all of that. I'm sure we'll get into it. But I was kind of phase one and you

could have made a lot of money just betting that it wasn't going to go bankrupt. I think phase two was proving that this is a good business model and the best business model in the industry. And I think that that phase began kind of when they did the debt restructuring and you know, fix the balance sheet to give them room to kind of implement all the efficiency measures that they wanted to put in all the proprietary tech that they'd been working on, stabilize the business, improve the unit economics, and then they kind of surpass CarMax's profitability earlier this year, like Q1, Q2 of this year. So I think that was the end of phase two. And that kind of took the stock from 40 to

125. And now we're kind of at, you know, double that price plus or minus. And we're in phase three, which is the lowest IRA, but probably the, the, the, the, the, the, the, biggest longest phase where it's a question of how far can you take this model how fast can you grow when you ask about like what's what the market may be missing i think there's still a lot of confusion around the scalability of the business model even even very bullish people or you know they don't model in positive incremental margins from here they model in declining unit economics as the business scales i think that's a mistake so i think that's a big one and then it's kind of a debate on how far can this business model go? Like how far can this, how high can

market share go is either at 1%ish plus or minus today. They're growing fast. They've turned growth back on. They're growing inventory. The machine is kind of ramping up. And the question is, as the machine ramps up, the street, you know, sells out expectations, I think have low 20% unit growth expectations for this year. The early data suggests something much higher than that, more like 50% so far. It's still very early, but we'll see. You could kind of look at their production rates over the last three, four months and get to numbers that are much, much higher than what the street is modeling. And so it's kind of a debate on, I think there's two things. There's how fast can they grow? And then what are the economics attached to that

growth as they accelerate? Because what everyone fears is what, you know, they went through the hyper growth phase pre-COVID, and the stock fell 99% because they kind of mismanaged the growth, you know, got ahead of their skis a little bit, not just a little bit. And the economics went strongly negative as they hit the gas on growth. And people fear that that's going to come back again. Let me just ask a question on that, right? Because one of the things that has scared me, and I think my first notes on the company were from 2018, 2019. So I've loosely followed it for a while. I think I've had friends who've pounded at the table at 300. I've had friends who've pounded the table at three. And one of the things that's always scared me here is it went

from 300 to 3, right? And it, you know, stock price, I've seen stocks go from 100 to 30 on no fundamental news, but it went from 300 to 3 because they were having real issues. And I guess one of the things that has always scared me is, was that because they got over your skis? They did the adest acquisition, the balance sheet got stretched. But or was that because, hey, this business is a lot more cyclical than people think, like, yes, it is selling used cars at its core, but maybe there's something about the model that is just hugely cyclical. And right now it's working, but in 10 months, we'd say,

hey, interest rates ticked up. We'll talk consumer, I'm sure it's on consumer sentiment got a little bit worse and this huge fixed cost infrastructure. They're really, like they're laboring under it. And the stock's gone from 250 to 25 again or something. You know, does that make sense? It's just, it's hard for me to marry this category killing company with the like the near near near death experience.

they had in 21, 22. Yeah, it is a very rare, uh, the dive down and the bounce up as it's a very rare thing to happen in the public markets. If you base rated it, a stock down 99% this is like the exception that proves the rule, right? 99% of the mark coming back. I mean, to me it was it's the closest analogy I've come up with is American Tower in 2002, you know, from $60 to 60. And then it's, you know, bounced.

what is it a couple hundred dollars a share now i think that's right yeah so what you need is the combination the potion you need to create a down 99 that isn't existential is super high fixed costs um like what what am i going to say uh high operating leverage business model where growth slows at the same time as high financial leverage and so and then dependence on capital markets and a fear of liquidity tightening you if you get those three things combined, you have a potion for massive volatility because the equity just starts getting like price for maximum fear. Having lived through 07, 08, 09, you know, you saw some of that back then. 2002 is a little bit before my time. I started my career in 2004. But the first

industry I studied was the cell tower industry. So I was very close to kind of studying that that historical period in 2004, after they had to kind of bounce out of the trough. So I think Carvona diving this much or driving down 99% is more of function of high operating leverage, high financial leverage, and capital markets seizing up all happening at the wrong time. Growth slowed at the same time that capital got more expensive, and the consumer pulled back, and then the traditional channels for them to cycle their capital as a dealer, started to either get more expensive or get a little more difficult.

And then you have, you know, peak fear surrounding something. And it never should have gone down as far as it did. But, you know, equity guys can be pretty, they can freak out pretty easily. So I think you need that kind of combination. And what's, you know, the interesting thing going forward is those characteristics. So from a macro perspective or industry perspective, use cars are pretty stable. I mean, it's 40 million units plus or minus, call it 10%. I think in 2022, during that drawdown, they went from like 40 to 36.

So you had a 10% drawdown in units. But we're talking about a company that has like sub 1% market share at that point. So it shouldn't, it didn't need to necessarily impact them. Like right now the market, I think, you know, Cox Auto estimates this year growth of 2.5%. you know, the industry growth rate doesn't really impact or shouldn't really impact Carvana. It shouldn't be a governor on Carvana whatsoever at 1% market share. It shouldn't have been back then, but you had the cost of capital spiking aggressively as interest rates are going up. You had the consumers pulling back and you had the company kind of overbuying

inventory and buying Adessa at the same time. Just like this potion of expensive capital to buy Addessa, expensive capital across the entire capital market complex and liquidity being pulled out of the system. That was the combination of factors. Now, the question, to your point, what happens from here? Why can't that happen again?

I think what they did after 22 was focused on the internals of the company, the efficiency, the unit economics. They were kind of growing at any cost previously and using a lot of third party vendors to do certain functions like, you know, paintless debt repair or even logistics and kind of the middle mile of the network using third-party trucks and drivers. And just filling in gaps with third parties, which was much more expensive. So that wasn't like a fully vertically

integrated way to run the business back then. Now they've kind of pulled everything back into first-party infrastructure, labor, and workflow and processes. So I think they've fixed a lot of that. And that's where a lot of the gain happened from 22 to 23 to 24. So I think they won't go back to that anymore. I think they know they've learned their lesson there. And I think the cash flow of the business is now so strong that they don't have to worry so much about capital markets. If you look at their floor plan, I mean, this is an auto dealer that basically doesn't use it's floor plan. And that's a pretty fascinating thing. I think it's, they have a billion and a half of capacity on the floor plan. It's like under 100 million of utilization on it last

quarter. So they have, they could, they have plenty of sources of capital if they need it. But I think the, the organic business is now on such a strong footing. If they got hit by a wave of disruption in the economy or anything like that, I think they can absorb it. a lot better now. It doesn't mean they won't be impacted. It doesn't mean growth wins slow. But to have the kind of negative leverage on every front, I think would be a lot more difficult to see from here. This podcast is sponsored by Dilupa. Earning season is hectic. There's no way around it. But what if you could take back the time you spend on manual model updates? With Delupa, you can. Delupa automate your audit and update

process, instantly pulling accurate, fundamental data from filings and reports directly into your models. That means no more wasting hours on repetitive. task. Instead, you can focus on analyzing trends, refining strategies, and staying ahead of the competition. Stop letting manual work slow you down. Set up a free account today by visiting dilupa.com slash y-A-V and see how Delupa can transform your workflow. That's Delupa, d-A-O-O-O-P-A-com slash Y-A-V. Let me ask a different question. So the company, as you and I are speaking, stock prices around 250, 50 billion, 50 billion market cap, 55 billion-ish EB. And I'm just looking at the balance sheet, right?

2 billion of equity capital in, 5 or 6 billion of debt in. So, you know, invested capital, 8 billion, total liabilities are 7. So if you want to call it 10 billion, whatever. So that's a lot of value creation that the market has given them, right? 10 billion of invested capital or less to 55 billion in value. I guess when I look at this, you know, Carbana is online used car retailing. As you said at the beginning, there is no one for the past 50 years who's been like, hey, the used car selling experience can't be improved.

But when I look at Carbon, I say, market is signaling, right? The market is a signaling function. It's signaling they are going to produce a lot of cash flow. I think you publish a rebuttal to the Hindenberg piece, which I should have mentioned earlier, I'll include a link in the show notes, that has them doing about $2 billion in free cash flow in 27 or 28, right, in the mid case. That's the equity capital invested here. Market is signaling someone should come in here and create a competitor.

But to my mind, like, you know, the years car dealers haven't really tried, room went bankrupt, was one other competitor that shut down, CarMax hasn't done, doesn't do anything nearly like the economics here or the integration here. So it gets my question, it's like, why is no one copying the Carvana model? And why is Carvana's model so Modi that, you know, I've seen high-fix cost things before. And when you've got the signal, hey, we'll reward you with five to ten times the invested capital market cap. Like that eventually does attract people. So what is so moody about it that prevents that? I mean, we've seen people try, right?

And I think your point on Vroom and Shift and others failing, that's a pretty telling point. I think Carvada was born with advantages that others didn't have. It was born with the advantages of being able to use drive time infrastructure and processes. And, you know, some of the initial IRCs were drive time facilities that they leased from them. they got to leverage the drive time expertise on loan servicing and subprime origination and things like that. You know, spinning out of a company that has a lot of experience and infrastructure and know-how gave them pretty nice, like a pretty nice head start on the vertical integration. I also think just the mere existence of Carvana at this size and scale nationally, a national brand with a national kind of

ad market, it makes it much, much harder for a new competitor to come in. Like, how would you, how would you try to, how would you or I try to enter this market? Okay, let's go buy cars from auction at wholesale. Let's bring them to some third, if we want to do capital light, let's bring them to a third-party reconditioning center, maybe pay Mannheim to recondition the cars to retail quality. We're paying variable cost on acquisition. We're paying for auction fees. We're paying variable costs to recondition the car.

How do we deliver to customers? We have them pick them up. If so, we now have a pretty narrow market. So we're now a local player, not even a regional player, but a local player. So then we have to market only locally using whatever media tactics you have to address a 50 mile radius, maybe. But it's a pretty narrow market, maybe 200 mile radius,

if you want to go pick up. If you don't, if you want to deliver to end customers, you have to go figure out how to take those cars and deliver them to the homes within a reasonable time frame. I mean, if you look at room and shift, the delivery times are crazy, right? Like, sometimes it'd be like 20 days to get a car. So to match a service level against Carvana, which is almost prime like in its delivery times, it's not quite there. It's probably like three to four, you know, four-ish days right now on average. If you're coming into the market

and you're just a local guy and you just have like, and you're using all third party, reconditioning, all third party outsourced kind of labor and infrastructure, it's not only way more expensive for you, but you can't even match the service levels that Carvana is doing today. Now, it doesn't mean that someone like Amazon couldn't come in and spend, you know, $20 billion to go pre-build all the infrastructure and say, okay, we're just going to go acquire land, which you probably can't do because you can't get it zoned very easily. I mean, if you look at, like, for instance, the Rockland IRC that Carvona built, I think it took them like seven years because it's California, number one, and it's just hard to get these places zoned and permitted because nobody wants one of these locally. So that's why Carvana, I'm kind of drifting a little bit, but their production footprint was like, you have like three facilities in Ohio.

It's because they could get, you know, them zoned and permitted in Ohio. They had nothing on the coast before Addessa, right? So it was like this weird footprint for production, almost like an agricultural footprint where it's producing in the middle of the country and shipping out to the coast. And it's very expensive to do it that way. And now they've kind of filled in the network with the Dessa. But as a new competitor, how do you get turnkey capacity to compete nationally if you want to to do it to do it efficiently?

How do you do kind of high service levels that are competitive with Carvana? And how do you make money doing that? I mean, everyone else was eating through losses. Carvada is the one that crossed the chasm. So it doesn't mean that capital can't come in. Speculative capital couldn't come in. But I feel like the barrier, who's going to fund it? Who's going to want to go compete against Carvana head to head at this point?

It's like competing against, if you exclude Walmart, some random new company coming in and saying, we're going to go build fulfillment centers and competing as Amazon. Like, good luck. just quick so they've got the national scale right and you mentioned that and obviously that does give them some advantages like whenever i watch the NBA guess what i'm getting hit with jack shepherd and christin bell pitching uh the carbana like almost trading your their used cars like a shot and there is some advantage there but you know it does strike me the use car game was a local game for a hundred years and most of your call a lot of the costs in the used car game if you're going

is the last mile delivery right like this is a really heavy thing you've got to have one truck that I think Carvana does. They've one or two cars per truck. You've got to hire the driver. They've got to bring it. And they're competing against kind of the hidden cost of in the old model. I would go to the car dealership and buy and pick up my car, right? So that's a cost that was kind of hidden there.

My question is how much of an advantage is that national level? Because, you know, if how much, how many times are they delivered the used cars in Florida and they're matching it with someone in California, right? Like, it does seem like this is a local game, and that doesn't mean it can't win, but it seems like it's like a local franchising game where most of the advantages are on that local level versus a national level. I don't know if I quite am hitting my point, but I think you see what I'm trying to do. No, I think I get it. And I thought about this a lot, actually. And I actually thought when I first picked up Carvana in like late 21, early 22, and I was digging on it before they announced Edessa, I thought there's too much long haul in this network. Yes.

And you can't offer national inventory with all these long hauls with the nature of their production footprint. It just felt really inefficient, really difficult to scale economically. I think what they've done since is two things. Number one, they got Addessa, which helped them a lot, regionalize and just have hubs, parking lots, local production to some degree. And they're, you know, they're ramping that up. Number two is I think they kind of, they and Amazon kind of in parallel, regionalized inventory a little bit better. How do they do that?

I think you can buy nationally if you want from Carvana, but you'll have to pay for the shipping. And so they kind of economically push people to the local inventory. And you don't need all 1,000 Toyota Camrys that are in inventory or whatever the number may be. you may just care about the 200 that are in your local market because that's enough. There's enough replication of similar models. It makes it models in years to not have to open the national inventory for that.

So I think it's, you're right, it is a regional business. Most people are looking at what they can get regionally and quickly. Nobody wants to wait eight days to get a car if they don't need to, to ship it from Florida to California or something like you said. So I think they've, it's a difficult business because you're, you're not replicating skews like toilet paper or paper towels in a fulfillment center. There's no replication here. These are unique vins, right? So you, you're managing a network of or an inventory of 50,000 plus unique, unique skews, but enough of them are similar enough that you can kind of optimize the network in that way and have enough regional inventory to meet the needs of the local market. So I tend to agree with you that the advantage is more about what can you do regionally or locally as opposed to nationally. But I mean, you listen to any kind of cable M&A call from, you know, the last decade plus all they talk about is when you get to buy nationally, national advertising and you get to, that's your ad market instead of just hyper regional, hyper local ad focus, your efficiency goes way high.

on building a brand. And I think they can kind of do it two ways. They have the national branding and then they have the local kind of inventory management, optimization, and delivery. Quickly on brand. So they do talk about leveraging the, like I'm just remembering the Q3 earnings call. They show, hey, here's our long-term model. And they talk about leveraging the advertising. And I do wonder, you talked about building a brand, but we mentioned up front. You buy use car every seven years. And I know some of the biggest bulls. hope like, hey, Carvana makes the experience so good and cuts out so much cost that maybe people go from buying every seven years, every five years, or every four years.

And then, like, you actually go from 40 to 48 million. I'm going crazy. Just on the brand, you know, is it really buying a brand? Because I think about, I grew up in New Orleans and the used car dealerships advertising a lot. And I almost think it's, you know, a little brand, but I think it's mainly customer acquisition costs, right? because you buy from a car dealership in 2000, you forget about them. And then in 2006, when it's time to go to a new car, you're open and they're actually

just trying to reacquire the customer. So how much of the advertising is brand building versus actually it's just a customer acquisition cost? Yeah, the short answer is I don't know the mix between. Silly question. I don't actually, let's just drop it because I don't think it matters for the long term. Let me talk about something that does matter. But let me say one thing on advertising that I found kind of, it helped me in my

analysis of the company. It helped me see where they're getting operating leverage when it didn't look like they were. The advertising and all the kind of variable expenses are, it's not just retail sales that they're attracting. They're attracting demand for sell to Carvana also, which is where they acquire 80% of their inventory, right? They buy more cars from customers and they sell to customers. So, and that's where their wholesale inventory comes from that they clear in the wholesale sales markets, right? So the thing that one of my aha moments when I was studying Carvano was realizing that they had gone from like 20% share of sell to Carvana inventory to like 80%, but they were dividing every metric by retail unit sales, which, but if you look at

retail, total retail transactions, they were effectively doubling the total retail transactions as they kind of moved from 20% to 80%. So they have the buy, sell to Carvana transactions, they have the buy from Carvana transactions. And if you, because they divide everything by retail units, say retail units sold, you're kind of missing. Oh, I mean, I was missing until I realized this. I was missing how much operating leverage they're getting on advertising on kind of the operational expenses, the variable operational expenses. Because they've got to go pick up your car if you're going to sell it, right? But that cost is not included on a retail sale.

And most of their sell to Carvana volume is not going to a trade-in directly. It's usually an isolated, I'm going to sell my car to Carvana, and separately someone else is buying a car from Carvana. But that's a last mile visit that has to be paid for us, divided by retail unit sold. So never shows up, you know, and there's advertising to acquire that inventory that doesn't show up. So to me, you can see the operating leverage in the business more easily if you kind of looked at it that way and looked at total retail transactions. actions instead of retail units sold that is a fascinating insight it also speaks to every commercial i can remember from them is like again the dach shepherd christen bell it's them selling their car not them buying their car so they're clearly looking for the inventory do they offer

when if i sell a car it's a carvana and i sell it for 15k is it like hey 15k in cash or 15.5k if you use it to buy another car off carvana no okay okay not that i'm aware i mean when i i traded my car on a And it didn't matter that I was buying one. It wasn't like, I'm just curious. Quick question on economics. So you, again, I'll link your rebuttal report to Hindenberg. And we'll talk that in a second. You have a $4.25,000 EBIT per unit in 27 or 28 on a million units in kind of the medium term.

The company, I think they're Q3 called. They mentioned, hey, we think we've got the infrastructure right now in place to grow to three million. So obviously there would be more operating leverage before that. But I look at that 4.25K number and looked at some autos before. And like LAD, big, mainly new car retailer, their gross profit is $4,000 to $5,000 per unit. And that includes new cars, which obviously you're going to have a larger profit than used cars. Car Max, I'm not crazy familiar with them, but I pulled up the 10K and the 10Q.

And they're like, again, this is gross profit, which is above EBITDA, 2.3,000 per Jeep per used vehicle and maybe another 600. for GP. So, you know, that's, let's just call it 3K. I'm not sure how the other relates, but 3K and GP before SG&A, right? So I look at your numbers. I mean, even right now, I think Carbana is doing EBDA per unit above the gross profit per unit of a lot of their peers. Yes, nationally scaled. But we've talked. A lot of these costs are, you know, pretty fixed and they're going to be pretty similar for Carbon versus others. So how are they getting economics so much better than peers. I think there's two main points

to talk about on that. Number one is a definitional difference. Their GPU is defined in their EBITDA or maybe just talk GPU. Their GPU is defined differently. They include they exclude logistics costs from their

gross profit. CarMax includes it. So logistics to them, which is middle mile, that's embedded in the for CarMax. It's not for Carvana. So you kind of have to, you know, bucket, re-bucket the costs and adjust for the definitional changes and differences between the companies. They also put in wholesale. And like, it's transparent. I'm not saying they should or shouldn't, but everyone should

kind of make the adjustments as appropriate. They add their kind of wholesale revenues and gross profit into the GPU metric, which has nothing related, it has nothing to do technically with a retail sale, but they put it in, again, when I talk about dividing by retail units sold, you know, just as I, you know, there's something to discover on the cost structure when you look at total retail transactions, there's other things to discover or realize when you're dividing things that don't relate to the sale by retail units sold like wholesale. So I think there's, that's that's one avenue of difference and you know i and i've done i've tried to kind of compare apples to apples i thought jp morgan did a pretty interesting uh job around this hindenberg thing earlier this month about kind of comparing carmacks to carvana line by line through gp u shipping fees and shipping expenses you know sgna per unit things like that so i think if you look category category by category it makes sense however carvon is still more profitable so the second is I think the vertical integration and how deep the vertical integration is generates

over a thousand dollars probably closer to two thousand dollars a unit of efficiency gains if you look at someone like is related to the processing of a unit you know not having to buy from auction so you're buying from customers there's better margins for you and the others. So you'd have to kind of compare like for like to understand that relationship and how they compare. They have their own shipping and logistics. So and their IRCs are more efficient because they're a much higher volume, right? They're doing, you know, 40, 50,000 units a year. CarMax per location does like 5,000 units of sales and they do most of their stuff on site. So it's just a, they've arranged the infrastructure differently for higher, higher volume,

higher scale. There's more proprietary tech. It's much more of an assembly line kind of inspection and reconditioning process. I've visited a few of their facilities and it's, it's impressive what they do. It's much more automated and they're just like the processing times are, are, you know, very scheduled and it's much, if you were doing high volume production of non-standard items, is probably what it would look like. So I think they have efficiency gains there. And then the third bucket or the second bucket within the kind of higher efficiency vertical integration part of the the delta with others is the financing operation. So their finest GPU is higher than everyone else's. If you look at CarMax, about I think 45% of their volume is originated

by CAF, you know, they're captive of CarMax Auto Finance. That's where they have kind of the full stack of profitability as mostly around prime originations then they use tier two and tier three and tier two is where they get paid a little bit to kind of originate the or flip the loan to a third party or have a sorry a third party pays them to originate the loan on their behalf and then for the the tail tier three they're paying a third party lender to take that loan um just to make the sale So Carvana is a full stack, vertically integrated lender. So they originate all their own loans. It's about 80% of their transactions have a loan attached.

And there's a mix of prime and subprime. They go across the credit spectrum. I think because of their heritage with drive time, they have comfort in subprime that others don't, and the margins are higher in subprime. So I think that explains the bulk of the difference. Again, there's a definitional difference, and there's different business mix for each of these companies.

And if you adjust for the mixed differences, it's not that hard to get to Carvana's level of profitability. So you have the mixed differences, and then you have a definitional differences. You combine them, and this is how you get to Carvana's numbers. Perfect. Okay, that makes a total sense. I guess, well, let's just go to this because I think we'll address it. I want to talk valuation a second, but let's go to the elephant number. This company, Carbana, has been, I don't know if there's ever been a company that has attracted more short sellers.

Like, you know, when I was prepping for this, Hindenburg, the reason you and I connected is because you published the rebuttal to Hindenburg. Hindenberg publishes a piece at the beginning of 2025. Carersdale, one of the most high profile short sellers out there, publishes a piece at the beginning of 2024. So, you know, I short, I searched Jim Cano Carbana. Sure enough, I think in 2022, he said he had a short in Carvana. I mean, those are three of the most famous short sellers out there. I don't know. I didn't look up muddy waters.

That would probably be the fourth. And then you'd have the four most men of short sellers. But there was there a spruce point one also? What hasn't there been at this point? But, you know, this company is a, it's so funny. It is a fly. It is a fly trap for investors who love like quality compounders, like revolutionizing an industry, exactly what you described up front.

Right? You, several other high-profile bulls, I know, who make these type of investments in things that can just explode, capture a huge piece of the industry. And then it's also a Venus flytrap for these short sellers who focus on all of the issues that I think we've addressed so far. But, you know, they talk about accounting issues. You hit subprime. Subprime is a huge mention of these guys all the time. So, yeah, we could go line by line through the Hindenberg report. You basically went line by line through a lot of them. But I just want to ask, overall, at a high level, why are so many short sellers attracted to this company? It's honestly, like, I don't get drawn to this much controversy normally. It's been fascinating to kind of go through this experience.

People love to hate Carvana, and I don't know why. I think it's a couple of things. Number one, the Garcia family controlling and Renee's senior's legal history have been, it's just easy bait. Do you want to describe for people who don't know? Sorry? Do you want to describe the legal history for people who don't know? Ernie Garcia Sr. got involved in like the savings and loans scandals and I think or one of them in what the 80s, late 80s, early 90s, if I remember. And, you know, that's obviously not the kind of history you want from the founding, you know, controlling shareholder.

So I think a lot of people just assume that there's something nefarious that goes on because you can control. controls it. He has trading shares. You know, I think a lot of people make the easy job. And the short sellers are obviously much more sophisticated in this, but they're like, hey, controlling shareholder with a legal history plus subprime, right? Like, could you put together two better buzzwinds? That's one other thing. There's related party because of the heritage of the company and that's spun out at drive time. Carvanna used a lot of drive time infrastructure and they, this is disclosed. They lease facilities from drive time. Drive time also services or

affiliates of drive-time, Bridgecrest services, the loans that Carvana originates. And then there's like vehicle service contracts, VSCs, which are about $400 a unit of gross profit for Carvana. Those are, you know, drive-time pays Carvana a commission to originate those VSCs. And so when you have, you know, legal history, you have subprime and you have related party transactions between the companies. You kind of wonder these aren't arm's length

these don't seem like arm's length transactions between the two companies. Therefore, which one is subsidizing which, if at all. I've heard things like, you know, the funny thing is that the narrative changed. In 21, 22, when they were 22 when they were going through all the negative

Ubita, the argument was that oh, already seen you're screwing Carvana. He's overcharging for everything. because he's plowing money straight from Carvana shareholders into DriveTerm's pockets. Now, even though the terms haven't changed, now Carvon is so profitable, Ernie must be undercharging and not giving the market rates and he's selling his stock to go fund the losses he's taking in at drive time. It's really like, yes.

How can it be both? You know, I tell you, how can it be both? In your short report, I've always had a related party, related part of my head. I think the thing I like the most is you like actually laid out the math and you're like, look, at this point, Carvana's growing so big, even if you make reasonable assumptions on the related party, you're talking like a very, very small. I think you laid it out as 2.5% of their EBDA would be coming from the related party, even if you made some pretty like conservative on the giving them not credit of the doubt for it. Yeah, I think I think I argued if you, if you double,

if you double the cost of all these things that they do together, it would be in two and a half percent impact EBITDA. It's just not big enough to commit any kind of improprieties over. So, you know, people have different definitions of what's big enough, I guess. But like, why would you put at risk your, if you're the Garcia's or if you're Ernie Senior, why would you put at risk your tens of billions of dollars of value in the stock over, you know, one percent of EBITDA? Well, I think that's a good question, but my pushback would probably be, why do they continue to do it, if that's the case, right? It's such a small thing, and it causes so much consternation. I agree. I mean, I wish that they would just have arm's length, transactions and counterparties

with unrelated parties to do these things. I do think that Bridgecrest, well, you know, why do they use Bridgecrest? First of all, Bridgecrest services all loans originated by Carvana, held by everyone. So when Ally buys a loan from Carvana, Bridgecrest is servicing it. If Ally had an issue, you better believe we would have heard about it by now, right? Like, they're not going to keep rolling this MPSA, the Forward Flow Agreement if they hate if the servicer is not doing a good job and they hate the servicer and or if it's uneconomic, right? All the ABS investors that are buying ABS from Carvana, those loans are being serviced by

Bridgecrest. So that, I feel high confidence that that's got to be market rates. And I think the feedback that I've heard through my research is that it is market rates. So the ones that are more opaque are like, you know, the extended warranties, vehicle service contracts, you know, gap waiver insurance, which we don't necessarily have as much of a third party check on that because it's not, those aren't like fluid in the market. And, you know, I, I don't know. I wish they. No, we get to be easier there, but I'm with you on the ABS side, on the ABS side, if they were charging too much for the servicing,

well, then the ABS buyers wouldn't be getting their return and nobody would buy the ABS, right? Exactly. I mean, you would feel it in the market response, right? So, you know, the ones that get picked on are the ones that don't have a proper market response. I think that one of my bigger points in the rebuttal piece was just that like the argument that they originate terrible paper that's getting, you know, bought up by related parties indirectly. First, let's just argue, is the paper good or bad? And I think if you if you go through the loan performance, which is what I what I did in that piece or to write that piece,

their loan performance is better than CarMax for prime and it's definitely in line with other subprime. You know, were there some cohorts that, you know, perform worse than expected, you know, in the early 23 vintages? There were, yeah. But they kind of tighten the standards and then now they're back to trend lines. So I think to make an argument that this $400 billion ABS market that's buying paper from Carvana regularly, repeatedly, and it can trade in the market with each other that they're so stupid that they don't notice that Carvana's loans suck. I just think it's an arrogant position to take as Hindenberg to say that this large and liquid market is completely wrong. don't look at the performance, just trust us that it's not good paper. Like, it's an absurd argument.

I don't know who would ever make that argument, honestly. I don't disagree there. A lot of the short reports do seem to focus on the subprime nature, right? And I think there is some worry that, hey, if these guys are underwriting bad, like really subpar loans, maybe the environment over the past five years has just been really good. and you've kind of got the famous Buffett, you know, the tide is not out yet, but maybe if the tide goes out and, you know, there was huge demand for lower income workers over the past five years, shortages, minimum wage is going up crazy.

Maybe if you have some of that change a little bit, all of a sudden these loans start looking a little bit worse with a little seasoning. I don't know if I'm making that up, but that seemed, you know, all the short reports just hit subprime, subprime, subprime, subprime, so I'm kind of like trying to be generous with a point that could be made here. Yeah, you know, they do over index to subprime and nonprime. So that's that's a known, that's a known kind of risk, I guess, for Carvana, I would say. I think they have a specialty in it probably because Bridgecrest is really good at servicing

and drive time slash Bridgecrest is really good at servicing those loans. And they have embedded kind of history and expertise and making money off of that. It's like arguing that credit acceptance must be a horrible business because they, because of their customer base. It's funny because credit acceptance, this is CACC, if I remember the ticker correctly, has been a very popular short over the years. And the stock is what, like a hundred bagger or something. And I was thinking in my head as I was researching prepped for this, like, look, everyone looked at credit acceptance, is subprime, all these sort of stuff.

And the stock has just kept performing for 10 or 15 years. And it's done incredible. And I was wondering if the same misguidedness of the shorts and credit acceptance was what was happening with a lot of car. Yeah, I think it's just a little bit unsavory, right, to be lending at 22, 23% interest rates and the customer base that would be accepting of those terms. I think people feel uncomfortable and it feels unsavory to them. But one of the value propositions that Carvana has, it's not just the convenience factor.

And it also matches supply with demand across the credit spectrum. And it's a very different workflow versus going to shop for a car normally. Like normally you go find a car, you test drive it, you talk to the sales guy, you negotiate price, and then you go into financing, and then you figure out, then you hear what your monthly cost is. And Carvana democratizes that whole process or the whole inventory and says, okay, give us a light, we'll do a light credit check that doesn't impact your credit score. You can then go shop by monthly payment and down payment across the inventory.

It's a very different workflow. And I think they've done a good job at getting people into cars that maybe wouldn't be welcome at a CarMax or as welcome at a CarMax or other used car dealer. But it doesn't mean the terms are attractive, right? Like they might be super onerous, 23% interest rate with $4,000 down. But maybe they really need a car. And they have bad credit. And this is just what the market will bear. I think it would play out, I think a concern to play out if their cohorts and, you know,

each of their vintages were really underperforming and getting worse. I think they have pretty steady performance across the, the vintages. Like I said, I think some of the early ones in 2023, they were probably a little too loose with. And so the cumulative net loss expectations have gone up from, I'm going from memory here, but I think, you know, if I think of a 20, 23 N1, 17 and a half percent expected losses over the life of the ABS to like 22-ish, 22 and a half maybe. So they have definitely stepped up. And I think they've tightened their underwriting late 2023.

And then they're kind of, their curves have come back down to more normal, you know, versus historical performance. So last one of the short sellers, and this is an awkward one to ask. but it's kind of addressing the else from the room all the short-seller report particularly hindenberg but all of them kind of i mean hindenberg comes out and says it but they allege like hindenberg says hey we talk to a former director and they basically say things aren't as good as it seems right i think they say like one of the quotes from a former director is drive time is like fight club like nobody talks about it even though it's the big elephant in the room and we've already

addressed drive time so we don't have to address that one specifically but you know it is always a little scary when you see short sellers come out and they've got, hey, we talk to 50 farmers and all 50 of them were like, this is a flaning pile of poop and everyone should avoid them. So how do you kind of mesh that with, you know, this is an experience people seem to like. I've talked to people. I don't have a car. So I can't buy one. But I've talked to people who've bought Carvonne and my friends have.

They've liked it. But, you know, it is scary when you see that. So how do you kind of mesh those two? It's a good question. I do my own calls with people in the ecosystem, former employees and all that. And it's strange to hear that kind of feedback when I have, I don't know, dozens of conversations I've had across the ecosystem and with former employees that, you know, there's pluses and minuses in every call, right? Like some people got fired and they're really pissed and they want to like talk, talk badly about the company. some people left on great terms

and they still own the stock and they want to pump up the story, right? So you kind of have to take it all with a grain of salt. I kind of just try to verify with my own work and not worry about what other people are figuring out or publishing. If you go to Tegis or AlphaSense

or Third Bridge or whatever and read about Carvana, I think most of them do not agree with the conclusions that Hindenburg put out there. No, it's one of the tough things about expert calls. You talk to a former, and sometimes the formers are just ripping it down. And then you can even go talk to the manager sometime and be like, hey, I talk to your former, you know, VP of accounting.

They're like, oh, yeah, that guy who got fired for drinking on the job and like none of our numbers were correct. Yeah, he might not have been super happy with us. Or, you know, I've also seen, hey, it was between the CFO and the CFO for the CEO job and the CFO gets chosen. And then you talk to the CFO a year later and he's extremely better. And he's like, that guy sucks, you know? And no, he doesn't sell. He, you know, maybe you're better than him. But for one reason, another, he won.

But anyway, thought it was worth that. I have two last questions. And then we can wrap it up. We can talk more Carvana. We can start talking cruises if you want. I've always had an obsession with the cruise line stocks. But two last questions. First question.

We talked a ton of stuff, but there's a ton of stuff we haven't talked about. I just wonder, what if you and I were sitting here three years from now, five years from now, and Carvana hasn't worked for some reason. And you can define hasn't worked however you want. The stock's flat over five years. The stock's down 99% over five years, however you want to. What do you think would be kind of the biggest thing that five years from now, you say, hey, Andrew, I kind of underestimated this or I didn't realize this,

that it caused its underform in five years. Yeah. What's interesting about Carvona is that it's not obvious, it's not obvious where a competitive threat, a direct natural competitive threat would arise. You know, we're talking about super fragmented industry. Normally, I'm always concerned about competition. and someone undercutting or someone disrupting in some way. I don't have, it's hard to articulate why that would happen

because this is an industry that just cannot, outside of Carvana, they're not really set up to grow very fast. And they have 1% market here. So disruption affects, like, the field much more than it affects Carvana. So, you know, I kind of put that one to the side for the most part. It doesn't mean that something crazy can't happen. But since, like you said, most of the business is done, locally and there's a local negotiation on pricing,

they can tweak with their algorithms and their data, science, like how to price in Atlanta versus Los Angeles and optimize the kind of inventory to maximize yield from the inventory. And I think they can kind of get around any local pricing aggression that may happen here or there. So then it's a question of, to me, I think the biggest question mark is,

If you saw the cohort slowing in the more mature markets, the growth slowing, like Atlanta is their first market, right? If you saw that curve flattened out, and it's been like a weird period because we went through 22, 23, where there's like no volume growth, 24, we're kind of getting back to growth, 25 is going to be a bigger test. But if you saw some of the more mature markets stabilizing at 5% shares, 6% share, wherever it is, and then they have a hard time growing above. that i think it really truncates the kind of upside right tail upside uh to the stock and you probably have you could probably experience some significant multiple compression because you may be able to articulate upside to three million units which would be seven and a half million ish percent market share sorry seven and a half percent mark share but what if you can't

articulate beyond that then you become you go from growth stock to your sloth slamming into a wall and you have a real problem. So you'd have serious multiple compression. It would still be a very profitable business there, but you would have a real problem from a stock perspective. I think that's number one. And then the second kind of wild card, I guess, which I don't worry too much about, but is autonomous.

Yeah, yeah, it was on my list. What happens with, you know, Chinese OEMs coming in, what happens with autonomous and robo-taxies and all of that? My personal view on that is I think America especially is obsessed with private ownership of like transportation assets and for the vast majority of Americans anyways. You mentioned electric vehicles. Obviously right now I think the use car stock is three to four percent electric vehicles in America. So almost all of it is ice vehicles, but it is increasing in an electric. Are they well tooled? Like if we went to 100 percent electric vehicles sold, in America tomorrow, which would mean, you know, in five years, 80% of electric vehicles or 8% of use cars electric. Are they well-tool to refurbish and sell electric vehicles, or

would they have a little bit of stranded asset problem if they started, if ICE vehicles started getting phased out? Well, I mean, they do, the Model 3, I think was the most popular model for them last year, the Tesla 3. So they've already been doing a lot of pretty high volume in the Tesla complex. I think, you know, the reconditions tend to be cheaper, I believe. They kind of avoid the cars that need a battery replacement any time soon, so they won't do a battery replacement, which is the most expensive part of reconditioning an EV.

So if you take out battery replacements, the reconditioning costs per unit are lower. So it's actually cheaper for them. Would it strand capital somewhere in their infrastructure, you know, maybe, but I think the savings per unit would be net beneficial to them. I actually have two questions, but one of them will be quick. You mentioned 40 million used cars sold in America. They've got the equipment for 3 million.

You mentioned Atlanta. It just kind of struck me. You know, I know Atlanta decently well. You drive an hour and a half outside Atlanta. You get into some pretty rural places. Can Carvana profitly serve those pretty rural places where you have to drive? Or is it really the urban. in the hard suburban places where they can serve because a lot of the car ownership is in

pretty rural places and I could imagine where you're like, hey, sending a driver an hour and a half out, hour back actually costs a lot more on our logistic cost than this. And that would kind of cap the market. I don't know if that makes sense. I think when you're dealing with a GPU base of $7,300, call it. If you pay an extra $200 to make a delivery, you still make tons of money. Cool. No, just want to make sure. last question just valuation real quickly um you know i i'm just using your hindenberg short rebuttal which again will be included you know i qualified that i said these are not this is just illustrative but okay completely so completely go ahead uh we can forget that um you know 2000 24 guide

they had originally got an EBIT of one to 1.2 billion they say Q3 they say significantly above which for the mathematically minded i would have liked a number but Say 1.4, say 1.5, whatever you want to say, right? The EV here is $55 billion. If I was using the theoretical in your Indyborg short report, which response, which is 2007-20028, I can't remember the exact year, I think you had them doing, where's my numbers, you have them doing $12.50 per share and free cash flow, right? And the stock is $250.

So we're talking about a 20 multiple on three to four years. out free cash flow. Now, still growing quite quickly. We discussed how they still have a lot of room to grow and everything. But I guess I just wanted to quickly talk how you look at valuation, because those are very high headline numbers. And I think one of the things short reports have consistently said is they've got all this other stuff. But I think they've always kind of led with, hey, the valuation looks really high here. And they said that when the stock was 30. They said that when the stock was 200. But I do just want to talk, you know, if the stock was 20,000, I don't think you'd be involved anymore. Do you just want to quickly talk valuation, like how you look at a fair

value here? Yeah, I mean, it's a it's a growthy kind of company. The way I think about it is I'll go back to my cell tower analogy. You know, the cell tower business has historically has had like 7 to 8% returns at one tenant and like 25% plus returns at four tenants. You could look at this as like a we're at 400,000 plus or minus of units on a infrastructure base that can be expanded to three million plus units with an extra billion dollars of capital and that process has already begun. So maybe we're at like 15% utilization of the infrastructure, the assets. When you're at a million units, you're still only at 33%. To me, one of the most interesting things that I look at in businesses is where's the break-even point?

for this business and if it's a if it's like a cruise line or cruise ship like where's the break-even point if it's an airplane where's the break-even point and that tells you kind of something about the quality of the business and the scalability of it longer term and how how you know just the embedded returns or natural returns in that asset I think the multiple always be high as long as they're massively under-earning right now the way I think about it is let's say they have three million units of capacity and why should they stop there if they get there? Because if they get there,

their advantages keep growing. Their value proposition will be even better. They'll probably have one two day shipping. They'll probably have, they can overpay for your car if you want to sell, and they can undersell a car to me if they want to convert me. They can play with all these different knobs

in their kind of whole vertically integrated workflow to deliver value to me to close whatever units they want to close. Growth is more of a choice for Carvana than it is for any other. business I've looked at. So assuming that all of that is true, right now we have $7,300 or ish, plus or minus of gross profit per unit. We have variable costs of about $23, $2,400 a unit. So call it like roughly $5,000 of incremental EBIT per unit. Last quarter, I think it was normalized, as I normalize it, I think it was around $3,700 a unit. So as they grow, that $5,000 might get better through what they

call fundamental gains. They say there's more to get, but they're going to start giving them back to customers to accelerate growth. So maybe they'll stabilize at plus or minus 5,000 a unit. But let's just run out the model and say, okay, 3 million units, 5,000 a unit, that's 15 billion of EBITDA against your $55 billion EBITDA or EV today. So that looks pretty cheap, right? But the question is, how long does it take to get there? And then once you get there, to my prior point on what happens to growth, does it slam and hit a wall? If you're at 7.5% market share and you have all your advantages just got stronger going from here to there, where should you stop? Where should that natural endpoint be?

Should it be 12% market share, 15% market share? Are they going to sprinkle in Omni channel locations where they go from a vending machine and an desal location? in most markets to 10 of them. So you never have to go more than 10 miles. And now you're picking up from Carvada instead of them delivering because, you know, why not if it's that close? You know, they can, they can go a lot of different directions with this. You know, what I know is that this management team executes like more aggressively than

and better than almost anyone that I've found. I think they're young, they're hungry and they have ambitions far beyond the three million units. That's just what we can see today. day. They're going to, I'm sure, in Greenfield, some new IRCs well before they hit that 3 million to keep pushing that target higher and higher and higher. So it's kind of a question of like, okay, you could use a cell tower analogy and say they have one tenant today or less than one tenant today. But this is, it has this asset and this business has all the embedded advantages such

that it should get full tenancy. You can say this is like, you know, AAA office tower with just the bottom, you know, it's 50 floors, and you've got five floors filled today. If I believe you, and I think I do, that they've got all these logistics advantages and everything, I don't think they ever get to 100 to 100% market share, right? Because there's always going to be dad selling to kid or family member or something, but why don't they, you know, why isn't every used car dealer in the country obsolete? And these guys are basically any commercial used car transaction is running to them. Why isn't market share in the end game if I just took this to the natural conclusion, 50%, 60%, 70%.

Amazon doesn't have 100% of e-commerce, you know? Well, this is a standardized, right? E-commerce is 100,000 different things and some you want delivered, some you might want fresh. Like, this is 40 million units, pretty standardized. I don't know. Maybe I sound like a drugged-up bull here, but I, you know, you know, I'm honestly wondering, like, if it's as good as you're saying, and sometimes it's helpful to take things to the most extreme, why isn't every used caller dealer and maybe in the long run new car dealer dead? Like, why isn't Carbona every commercial car transaction that's happening with a consumer?

Yeah, I mean, it's if they offer the best, best terms to you and they can get you the car, let's zoom way into the future. Let's say they can do same day delivery and 60% of the country and next day and, you know, 20 and then two day within the last. last 20 for the markets that they serve, and they can pay you a price that you think is great or better than smaller-scale competitors out there. They should, I mean, there's the what should happen, and then there's the what does happen. And what does happen rarely matches what should happen, even if you zoom way out. I've seen a thousand times. Yeah, people may want to go test drive people may not trust their the quality of the reconditioning people may not like the terms that are floated in front of them because you know carbana doesn't necessarily they can win on a

lot of different dimensions so they may people may over index to wanting to touch and feel the car and they don't want to go through the whole return process or pay for shipping even though they can't return it they lose the shipping fees so maybe they just want to shop locally maybe carvana's not floating you the very best offer because they know that you will really care about the convenience factor and not having to negotiate a knife fight for four hours on it over a used car with a used car dealer so they're going to slightly tweak the price higher and maybe to your indifference points such that you will choose to go to a local dealer instead there's a lot of knobs that can be turned and they can kind of test preferences and elasticity of demand across a lot of different

dimensions because they have they kind of create so much customer surplus across tangible and intangible categories i think a lot of it is an optimization and through that optimization they can kind of test and learn what resonates most with consumers and what what generates the highest free capital per share for the for the whole company and what what generates the highest free cashable per share may not address 100% of the market in the best way the perfect no i'll make total sense, just like, I know I've looked at industries before where, you know, the management team will talk about capping out at 15% market share. And you'll talk to them and be like, I don't understand. Like, it seems like you should be able to grow to 30% or 40% of these national

advantages are true. And they'll list X, Y, and Z reasons, which are real reasons. You know, some of times it's, hey, an organization just can't support getting bigger. Sometimes it's, hey, there's three big buyers here and they won't let us grow any bigger. They'll, they'll go to another player, even if it's a little inefficient. And I was just wondering why this tap's up there. But that's great. I do think the peer-to-peer market is like, you know, an untapped opportunity for everyone in the used auto business. You know, if they, the way I've thought about it is if they make the transaction so easy and economically neutral to the buyer and seller in the peer-to-peer transaction, that is flow that could come their way that, you know, currently goes, it doesn't hit the retail market, right? So will they ever address the full 40?

like that's a big chunk. That's like 40% of the 40. I think it's like 15, 16 million units that are peer to peer. So that's a that's a big chunk of the market that they don't touch naturally today. But maybe they get it indirectly just through the seller carvana and normal retail business. So we'll have to see. There's there's also the fleets. I mean, they're starting to address that with the Hertz thing that's ramping up. The rental car fleets. And I think they're getting their hands into the whole value chain of a used auto transaction, you know, from wholesale, from the wholesale business too to all the stuff with the retail customers. This podcast is sponsored by Dilupa.

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competition. Stop letting manual work slow you down. Set up a free account today by visiting dilupa.com slash y-A-V and see how Delupa can transform your workflow. That's Delupa, d-L-O-O-O-Pa-com slash Y-A-V. Are the rental car fleets a potential competitor? You know, the rental car companies already sell their inventory. Yeah, I would just like consumer and also at auction They're big auction customers They're all pretty

poorly run to be honest But when you think like hey They have they can do the refurbishment Right They've got locations all across the All across the country You think about an enterprise They've already got to drive out to you option

I think Hertzon Like it's just the one thing But hey at this point it's been You know Carvana's been a hot stock for six years It's been a hot stock for four of the past six years like if they were going to do it they probably would have already done it but i was just trying to spin something up yeah i i don't think that's their they want to get into that core business of selling selling retail like that and going direct to consumer uh to your driveway basically

um but you know never say never it's just it's interesting it's very interesting that hurts is kind of ramping up its activity with carvana and they're getting premiums on kind of their when they clear out their old inventory, the old way would be to sell whatever you can at the specific retail locations and then clear the rest of the auction, they're finding accretion from

working with Carvana who can retail them and they can work out the profit share basically, so that it makes sense for both. Carvada gets the finance GPU and other services attached, which is like maybe $4,000 a unit plus or minus or $35.

And very hot, very light on the capital intensity too, right? So that's, gets the operating leverage, get you very light capital intensity. Yeah. Yeah. So from an EBITDA per unit basis, it's, it's attractive. And I think they said it was neutral to the EBITPRA unit.

So they're indifferent to who owns the inventory. And this is kind of like the beginning of three, you know, third party inventory going on Amazon, right? It's, it started out as one P. Now you're introducing marketplace dynamics. so it's there's a lot of a lot that can be done and to your point with new if if you know new emerging EV OEMs come into the picture wouldn't it be easier to attack the market through national get natural national distribution using someone like Carvana who has full reach next day

same day whatever it is instead of opening up however many a hundred dealer a thousand dealerships across you can you can turn on national demand tomorrow if you work with Carvana. It's a very powerful platform for anyone new coming into the country or into the market if it's Chinese zillion. I'm thinking of Chinese aliens. Aaron, this

has been really, really interesting. I learned a ton. I've been wanting to do one on Carvana for a while. I'm sure we're going to hear from some of our friends who are bulls that we weren't bullish enough on this podcast and some of our friends who are bears that we were way, way too bullish on the podcast. But this been great. I learned a ton. We're going to have to have you

back on for either talking dark fiber or cruise ships at some point, but really appreciate it, and we will chat soon. Thanks so much, thank you. I really appreciate it. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.