Carvana: Assessing the Moat and Margin of Safety

Carvana's 2025 performance reads like a classic turnaround story. The company sold a record 596,641 retail units, a 43% year-over-year growth that underscores a powerful operational recovery. More importantly, this volume surge translated into meaningful profitability, with the full-year operating margin expanding to 12.9% from 7.2% the prior year. This is the kind of improvement that can signal a widening competitive moat-proof that the business model is not just growing, but becoming more efficient and resilient at scale.

Yet, the final quarter of the year introduces a note of caution that is critical for any value investor. While the full-year adjusted EBITDA margin hit 11.0%, the fourth-quarter adjusted EBITDA margin was 9.1%, which was actually below the prior-year level. Management attributed this dip to increased retail revenue per unit from accounting changes. This disconnect between the strong full-year picture and the softer Q4 margin is a classic signal of cyclical pressure. It suggests that the impressive 12.9% operating margin may not be the new baseline, but rather a peak that could compress as the business cycles through different market conditions.

The core question, then, is whether these gains are durable or transient. The record unit growth and margin expansion are real achievements, demonstrating the company's ability to scale its e-commerce platform and improve unit economics. However, the margin pressure in the final quarter, even if partly accounting-driven, highlights the vulnerability of profitability to changes in vehicle pricing, cost of funds, and the mix of transactions. For a moat to widen, a company must compound value through multiple cycles, not just one strong year. Carvana's 2025 results show it can do the latter. The sustainability of its 12.9% operating margin against future headwinds will determine if it can achieve the former.

Valuation Under the Buffett Lens: A Gap or a Trap?

From a value perspective, Carvana's current price presents a stark puzzle. The stock trades at a trailing P/E ratio of 86.2, a notable discount from its 120 level at the end of 2024. On the surface, that's a welcome relief. Yet for a company with a 12.9% operating margin, that multiple remains sky-high. It signals the market is still pricing in a future of explosive growth, not a stable, profitable business. The gap between the current price and the company's demonstrated profitability is the central tension.

The market's recent reaction underscores deep skepticism. Despite beating revenue and unit sales estimates in the fourth quarter, the stock tumbled 7-20% after the report. The catalyst was a miss on adjusted EBITDA, which fell short of expectations. More telling was the lack of a clear forward guide, leaving investors to question the sustainability of the growth story. This volatility is the noise of a speculative stock, not the steady hum of a value compounder.

Contrast this with the long-term conviction of institutional investors like Optimist Fund. The fund highlights Carvana as a top 5 holding, citing its record quarterly results and adjusted EBITDA margin of 11.3%. For them, the current price is a gap-a buying opportunity that reflects short-term doubts about margin sustainability, not a trap of overvaluation. They see the path to 3 million cars sold per year at 13.5% margins by 2030-2035 as a credible future earnings power that justifies today's premium.

So, is it a gap or a trap? The answer hinges on your time horizon and tolerance for uncertainty. The high P/E ratio is a valuation overhang that demands flawless execution to justify. The recent stock drop shows the market is willing to punish any stumble. Yet, the institutional backing suggests a belief that Carvana's operational turnaround is real and scalable. For the patient investor, the key is whether the company can compound its 12.9% operating margin through multiple cycles, turning its record unit growth into durable, high-quality earnings. If it can, today's price may be a gap. If margin pressure returns, it could prove a trap.

Catalysts, Risks, and the Long-Term Compounding Test

The path from a powerful operational turnaround to a durable, compounding business is paved with execution. For Carvana, the immediate catalyst is clear: the company must deliver on its promise of significant growth in retail units sold and adjusted EBITDA in 2026, with a sequential increase expected in the first quarter. The record 43% year-over-year unit growth in 2025 provides a strong base, but the test is whether this momentum can continue profitably. Management's guidance of "significant growth" is vague, a stark contrast to the detailed targets it once set. This lack of clarity, coupled with a recent stock drop of roughly 15%-20% after the earnings call, shows the market is demanding more concrete proof of the growth engine's reliability.

Yet, alongside this growth catalyst looms a set of risks that could permanently impair the company's moat. The most persistent challenge is restoring confidence in financial transparency. Carvana is facing fraud allegations and an investor lawsuit, with scrutiny focused on its complex relationships with entities controlled by the CEO's family. This environment of doubt is compounded by a concerning pattern of insider selling, with insiders offloading over $170 million in shares in the past 90 days and no purchases in that period. For a value investor, such actions, especially during a period of heightened legal and accounting scrutiny, are a red flag that can erode trust in management's alignment with shareholders.

The core long-term test, therefore, is twofold. First, value investors must monitor the sustainability of that explosive 43% unit growth rate. Can Carvana scale its platform without a proportional rise in costs or credit risk? Second, and more critically, they must watch whether the 12.9% operating margin can expand, not contract, as the business grows. The dip in the fourth-quarter adjusted EBITDA margin to 9.1% serves as a reminder that profitability is fragile. The company's ambitious goal of selling 3 million units a year at a 13.5% adjusted EBITDA margin by 2030-2035 is a compelling vision, but it is a future state that must be earned through multiple cycles of execution.

In the end, the question for Carvana is not just about hitting next year's targets, but about building a business that can compound value through good times and bad. The catalyst is growth; the risks are credibility and margin sustainability. For the patient investor, the setup is one of high potential reward balanced against significant execution and trust risks. The company's ability to navigate this landscape will determine if it becomes the durable compounder it aspires to be, or remains a story of impressive but volatile performance.