Carvana Anticipates Margin Improvement: What's Driving the Growth?

Core Insights - Carvana Co. (CVNA) achieved a record adjusted EBITDA of $488 million in Q1 2025, an increase of $253 million year over year, with an adjusted EBITDA margin of 11.5%, up 3.8 percentage points, leading the auto retail industry [1][8][10] Financial Performance - The adjusted EBITDA quality of Carvana is high due to relatively low non-cash expenses, and the company is focused on enhancing operational efficiency through various technology and process initiatives [2][4] - Approximately 80% of adjusted EBITDA converted into GAAP operating income, resulting in a 9.3% margin [8] - Carvana anticipates sequential growth in adjusted EBITDA for Q2 2025 and aims for adjusted EBITDA margins of 13.5% within the next five to ten years [5][8] Industry Comparison - Other auto retailers like Lithia Motors, Inc. (LAD) and AutoNation, Inc. (AN) are facing challenges in maintaining healthy margins, with Lithia reporting an adjusted EBITDA margin of 4.4% in Q1 2025, up from 4% year over year [6][7] - AutoNation's SG&A as a percentage of gross profit increased significantly from 60% in 2021-2022 to 66.6% in 2024, indicating degrading operational efficiency [8][9] Market Performance - Carvana has outperformed the Zacks Internet-Commerce industry year to date, with shares surging 67.3% compared to the industry's growth of 1.6% [10] - From a valuation perspective, Carvana appears overvalued with a forward sales multiple of 3.66, higher than the industry's 2 [13] Earnings Estimates - The Zacks Consensus Estimate for 2025 and 2026 EPS has increased by 83 cents each in the past 30 days, reflecting positive sentiment towards the company's future performance [15]