I think buying a car should be exciting. But the process can quickly turn into a headache. Between comparing prices, negotiating with salespeople, and figuring out financing. What starts as a simple purchase can feel like a full-time job. And when the monthly payments finally come into focus, the excitement can fade pretty quickly.
Plenty of shoppers are trading the dealership lot for a screen. Carvana (CVNA) sold 197,325 vehicles in the second quarter, up 38% from a year earlier, on record revenue of $7.38 billion versus $6.91 billion expected, with net income of $513 million.
CEO Ernie Garcia called it the company’s 10th straight quarter of industry-leading growth and profitability in its Q2 earnings statement.
In a letter to shareholders, Ernie also said that “our runway is huge,” noting Carvana holds only 2% market share of used retail and 1.5% of all automotive retail. However, higher interest rates are clouding the profit picture.
Also Read: AI could haggle for your next car, and one stock stands to win
Carvana keeps growing, but rates are squeezing profit per car
Morgan Stanley kept an Overweight rating on Carvana but trimmed its price target to $88 from $90 in a preview note shared with me at TheStreet.
Morgan Stanley argues the debate has moved from unit growth, which investors largely understand, to what higher rates mean for financing profit.
Related: Carvana, CarMax jockey as agentic AI tools look to fix the worst parts of car buying
The stock shows the strain. Carvana shares are down 30.30% year-to-date and 14.67% over the past 12 months, according to Yahoo Finance. Its second-quarter guidance also fell short of some Wall Street expectations, according to a CNBC report.
Carvana reports third-quarter results Oct. 28 after the market closes. Morgan Stanley cut its adjusted EBITDA estimate 2% to $797 million from $816 million. It models EBITDA per car down about $325 from a year ago at $3,759.
Why higher rates hit Carvana’s financing profit
The culprit is a line Wall Street calls Other GPU, or other gross profit per unit. It captures profit per car beyond the sale itself, including the spread Carvana earns when it makes auto loans and later sells to investors. When benchmark rates climb faster than the annual percentage rates (APRs) customers pay, that spread shrinks.
The two-year Treasury yield has risen about 80 basis points since the second quarter, while APRs in Carvana’s latest securitization rose 23 basis points, Morgan Stanley noted. Management has said each basis point of rates not passed on to customers costs roughly $4.50 per car. That implies a gross hit near $365 per car before offsets.
