Carvana: Why Millennials Should Make A Small Investment Now (NYSE:CVNA)

Shares of auto-sellers like Carvana (NYSE:CVNA) and CarMax (NYSE:KMX) have been hammered. I own Carvana and it’s been zero fun. It’s down to $5 a share. The stock is down 97% off its highs.

Do I wish I’d taken more profits when Carvana’s market cap was at $20 billion a year ago? Yes, yes I do. As a matter of fact, I wish I had sold all my stocks a year ago and played on a beach in 2022. Unfortunately, my crystal ball was on the fritz and my net worth has come tumbling down. That’s what happens. The stock market is a roller coaster and it makes many of us want to get off the ride.

Nonetheless, I remain an optimist on Carvana shares. I concede the possibility this stock might go belly up. That’s the downside. So buy 100 shares and be prepared to lose your $500. Now for the upside: somebody is going to dominate the internet market for used car sales. And this is a massive, trillion dollar market opportunity. So pick your horse and get ready to ride.

It’s a no-brainer: used car sales will shift online

I ask you: is the future of used car sales on the internet? Whenever I ask a young person this question, they have no doubts whatsoever. They know the future of used car sales will be online. The internet transformation of our economy remains the most obvious investment theme of my adult life.

I recall when Amazon (NASDAQ:AMZN) stock dropped 95% or more back in the early 21st century. Many bears thought the company was doomed. I remember that Barron’s headline! The stock market was certain that the internet was a fad and Amazon was heading for bankruptcy. But kids like me who believed in Amazon were right, and the “experts” were utterly wrong.

CarMax – like Walmart – is the “safe” way to play the internet revolution. These companies have huge brick-and-mortar operations, and there are many, many people who believe that internet commerce is a fad(!) and people will never buy a car on-line. “It’s so scary! I need a salesman to show me how to drive it!”

I don’t know about you, kids, but I have zero patience for silly Boomers who are afraid of the internet. Don’t let the cynics and the negative nellies scare you off from what is a massive opportunity to increase your net worth. The internet will seize this market, as its seized so many markets, because once you discover optionality, you never want to go backwards.

The question is not whether used car sales will move online. Of course they will! My assumption is that the mom-and-pop used car dealers will eventually go belly up, and the strongest internet companies will take even more market share in these dark days. So who is going to be, Carvana or CarMax? Let’s dive in.

Are you shopping for a used car online? Invest where you shop

I’m a Carvana guy. That’s where I bought my BMW. I love my car and I was super-happy with my customer service. They fixed my front brakes before they let me drive off with my car, and when the back brakes started to go, they fixed them, too.

That’s how you do it! Make your customers happy and they will come back for more. Carvana invented this category. They are the “top dog” and “first mover” in moving the used car market online. CarMax – the largest used car dealer – saw the writing on the wall and made the difficult but obvious decision to try to compete.

CEO Ernie Garcia is a marketing genius. Carvana invented the car vending machines, a new way for cars to be delivered to customers. Yes, it’s a marketing gimmick. (I actually had my car delivered to me). But these massive car towers are a showcase for what is obvious: the used car salesman is going the way of the do-do bird. In the future we will no longer go to a brick-and-mortar dealer to shop for a car. That’s where we will pick it up. You will shop online and find your dream car there.

My family bought shares of Carvana because it struck me quite forcibly that this is Amazon 2.0. And our stock soared much, much higher. Now, because of macro events and a possible recession, Carvana as a business is in the danger zone. Carvana’s market cap has dropped to $500 million. (It was 40 times higher at the end of 2021). So it’s a scary stock to buy, and you might lose your $500 investment. But the upside remains staggering if the company can weather this storm.

CarMax might win

CarMax is the Blockbuster Video of the used car industry. In fact, the guy who started Blockbuster Video (Wayne Huizenga) tried to get into the used car industry, too, and created AutoNation (NYSE:AN). This was back in the days when “big box” retailing was all the rage. You would go to a used car lot and shop for your car there. You might have, what, 200 options?

I instinctively prefer the internet pure-play (Carvana) to the dinosaur trying to adapt (CarMax). That’s because Carvana is built from the ground-up to work as an internet retailer. Carvana assumes its customers are tech-savvy, and don’t really need assistance from a salesman working on commission.

But in a negative environment like we have now, there’s no question that people are worried about the future. “What if the internet is a fad and nobody buys cars on-line? CarMax has these wonderful brick-and-mortar locations around the country!”

What about a possible recession?

The question for Carvana investors is whether the company has enough cash on hand to survive in a negative environment. Let’s cut to the chase. The dealer had an ugly cash burn in Q3 ($720 million) and Q4 is likely to be similar. Carvana has $666 million in cash. On the positive side, the company has about $4 billion in liquidity resources.

Carvana has massive debts (roughly $8 billion), and it’s entirely possible the company ends up in bankruptcy court. But it’s also possible that Carvana – like Amazon before it – emerges from this dark period lean and mean, and actually takes market share from the copycats and all the mom-and-pop retailers who can’t compete.

Call it 50-50. 50% chance that Carvana enters into Chapter 11 and investors lose everything. (So you’re out $500). And 50% chance Carvana survives and thrives, and the stock soars back up to its highs over the next decade ($376 a share). I love those odds. (And don’t forget the massive short interest – all those hedge funds that are future buyers of the stock).

I see the high short interest as a bullish indicator. The bears have gotten ahead of themselves, going into debt to short a company because of its debts. The momentum, of course, is highly negative. But if there are any near-term positive surprises, look out! And unlike theater chains, for instance, the long-term future of internet commerce is highly promising. My advice is open up a small position in Carvana and put it under your pillow for 10 years.