Case Study: The Carvana Asymmetry
Why We Bought When Wall Street Predicted Bankruptcy (Jan 2023)
Date: January 2023
Subject: Carvana Co. (NYSE: CVNA)
The Consensus View: Imminent Bankruptcy
Our View: Deep Value / Structural Turnaround
The Thesis
In early 2023, Carvana was arguably the most hated stock on Wall Street. With the share price collapsing over 98% from its highs and major publications predicting liquidity failure, the consensus was that the business model was broken.
We saw company that was debt-laden, but not “broken.” One that had just completed a massive, painful, yet ultimately game-changing vertical integration. While the market saw a debt crisis, we saw a vertically integrated e-commerce giant with a structural advantage that competitors could not replicate.
1. The Strategic Moat: Understanding the ADESA Acquisition
The primary bear case centered on Carvana’s debt load, much of which was incurred to acquire ADESA in May 2022. Analysts viewed this $2.2B purchase as a reckless expenditure at the market top. We viewed it as the linchpin of their future profitability.
What is ADESA? ADESA is the second-largest wholesale vehicle auction house in the U.S. By acquiring them, Carvana didn’t just buy a revenue stream; they bought a structural competitive advantage with high profit opportunity.
- Cherry-Picking Inventory: Owning the wholesaler provides an opportunity to drive higher profitability than any other competitor. As the auctioneer, Carvana can now keep the best and highest-margin units for itself—effectively acquiring inventory below wholesale cost and selling it straight to retail. Competitors are left to bid on the remaining inventory, while Carvana secures the premium stock at the source.
- The Structural Advantage: Before ADESA, Carvana had to ship cars vast distances to a limited number of Inspection & Reconditioning Centers (IRCs). With ADESA, they instantly gained 56 sites within 200 miles of nearly 80% of the U.S. population.
- The Unit Economics: This vertical integration drastically reduced shipping times and logistics costs per unit. The market ignored that the “high debt” was actually the funding for a massive reduction in future variable costs and cherry-picking opportunity for higher quality inventory – with competitors picking up the “leftovers”.
2. Reading the Distress Signals: Debtors as Partners
The second signal was the behavior of the debt holders. In late 2022, Carvana’s largest creditors (including Apollo and PIMCO) signed a cooperation agreement to act as a unified block.
- The Insight: When sophisticated distressed-debt investors band together, their goal is rarely immediate liquidation, which destroys value. Their goal is often a debt-for-equity swap or restructuring that preserves the operating business.
- The “Back Against the Wall” Dynamic: When a company with a viable product faces a liquidity crunch, management and creditors are aligned in one goal: survival. We recognized that Carvana would leverage its new structural efficiency (ADESA) to prioritize profitability over growth—a pivot the market assumed they couldn’t make.
3. Mission & Market Share
Fundamental to our investment was the belief that the used car market—notorious for its friction, opacity, and poor customer experience—was still ripe for disruption.
- The Consumer Experience: Carvana offers a frictionless, one-stop shop (inventory, financing, insurance, delivery) that no traditional dealership can match at scale.
- The Runway: despite its size, Carvana held a low single-digit percentage of the total U.S. used car market. The ceiling for growth was, and remains, incredibly high.
Conclusion: The Asymmetric Bet
The market priced CVNA for a 100% probability of bankruptcy. We assessed the probability of survival as significant, driven by the ADESA inventory advantage, logistics network and the incentives of the creditors.
Investing is about recognizing when a company’s “back against the wall” moment is actually a catalyst for operational discipline. Carvana didn’t give up; they used the crisis to prove their unit economics. By identifying the disconnect between the perceived risk (bankruptcy) and the actual structural advantage (ADESA + Vertical Integration), we were able to capitalize on one of the most significant market mispricings of the decade.