Thread by @GuyDealership

FACT:

Carvana grossly overpays for cars.

But most people have no idea how it does it (including most car dealers)!

Here's a simple breakdown of Carvana’s operations:

🧵 (1/n)

First, let's understand how Carvana operates.

The company was built on the backbone of DriveTime:

A nationwide, vertically-integrated, traditional dealer group.

Similar to DriveTime, Carvana was built as a vertically-integrated auto retailer.

(2/n)

Let's define vertical integration in normal-people terms:

Carvana does a sh*t load of stuff in-house, as opposed to outsourcing.

This enables them to maximize the value they capture across the value chain.

But why does this all matter?

(3/n)

It matters because Carvana has more ways of making money than traditional dealerships!

The average used car dealer performs 3 activities in-house:

Buy cars.
Fix cars.
Sell cars.

Simple.

Now, let's take a look at Carvana.

(4/n)

Carvana performs these 3 activities plus *many* more:

Buy cars.
Transport cars.
Fix cars.
Finance cars.
Sell cars.
Warranty cars.

And more.

So, unlike a traditional dealership:

Carvana can make a lot more money *and* outcompete the competition.

(5/n)

But CDG, what's Carvana *most* important lever?

Undoubtedly:

In-house financing.

The ultimate competitive advantage.

(6/n)

Here's why:

Carvana sells auto loans to its consumers.

And it can increase/decrease interest rates on those auto loans.

This gives Carvana a magical way of increasing/decreasing their profits.

Whenever. It. Wants.

The craziest part: WallStreet loves it.

(7/n)

Here's how this actually plays out.

Scenario 1 (current US-market conditions):

Carvana needs cars but the market supply is tight.

(8/n)

Carvana's solution:

Pay more for cars + increase its interest rates.

Result:

1. Preserve profits.
2. Offer consumers the largest assortment of cars.
3. Outcompete the competition.

(9/n)

Scenario 2:

Carvana needs cars but the market supply is abundant.

Carvana's solution:

Pay less for cars + decrease interest rates.

Result:

1. Preserve profits.
2. Offer consumers the most competitive financing terms.
3. Outcompete the competition.

(10/n)

But there’s even more!

Carvana is valued by WallStreet as a “Growth” company.

And it’s frothy valuation is driven by it’s ability to continue growing fast and capturing marketshare.

(11/n)

This means Carvana is even *more* incentivized to overpay for your car.

Even if it comes at the expense of profits.

Because if growth stalls, its valuation will get crushed.

(12/n)

And that's a wrap!

If you enjoyed this thread, retweet, like, and follow me @GuyDealership for many more insights into the used car industry!

Stay tuned for many more car buying and selling insights, tips, tricks and hacks.

❤️😜

(13/n)