Good morning folks. I promised I’d elaborate more on the reasoning behind my bearish call on $CVNA.

The thread below explains why I believe used-vehicle values will remain strong in the short, medium, and long-term. https://twitter.com/DRuizG80/status/1274337773579694080?s=20

So why are strong used-vehicle values bad for Carvana? To answer that, we need to also consider residual values. For years, residual values have been higher at lease maturity than the wholesale values.

You’ve seen me cover this topic on several occasions.

When used vehicle values underperform residual values, return rates increase. This scenario is bad for automakers because their maturing leases will go to auctions instead of being purchased by the lessee or the grounding dealer.

While bad for automakers, this is good for standalone used-vehicle retailers since auctions are their main source of inventory.

In response to losses at maturity, automakers have been lowering their residual values for years.

Currently, used vehicle values are outperforming residual values at maturity. When that happens, franchise dealers exercise their significant advantage of first choice on lease returns at a much higher rate.

Residual value reductions from automakers will last for years. For example, if an automaker lowers residuals today in response to current losses, the benefits won’t be realized until current lease originations mature, and most lease mature in 36 months.

I believe the lasting combination of lower residual values and long-term strength in used-vehicle values will effectively starve Carvana of the inventory it needs to continue growing.

Note that when I wrote the following bullish article, the ability to acquire enough inventory to continue growing was the only caveat mentioned. https://www.blindersoffresearch.com/post/carvana 

Folks, if I have taught you anything, it's that inventory serves as an incredibly accurate leading indicator.

When Ernie said that Carvana currently has 1/4-1/5 of the inventory it had pre-COVID-19 nearly halfway through the current quarter, alarm bells should've been blaring. https://twitter.com/DRuizG80/status/1291351706068893698?s=20

Was there enough inventory to fuel modest growth in the last quarter? Clearly. However, their inventory is dramatically depleted, and it's not due to some transitory event.

It has to do with the relationship between residual values at maturity and used vehicle values that I described above.

And, no, this is NOT a short-term event.

Also, please don't fall for the commentary about growth in consumer purchases, it's not enough to offset the scarcity in auction volume and not nearly enough to fuel enough growth to justify Carvana as a growth stock.

I received a lot of heat/concern from folks after the price unexpectedly spiked despite a disappointing earnings report.

Do not be concerned, I know how to manage a position, and this isn't a day trade. This is literally my highest conviction call at the moment, and I'm a patient man.

By the way, the advantage of online sales that Carvana once had is disappearing at a blistering pace. Therefore, I would not get cute by thinking of this company as some revolutionary retail tech play, that time has passed.

Have a great weekend!