The sky is not clearing up for Carvana.
On the contrary, big clouds continue to gather over the company which was one of the big winners of the covid-19 pandemic, with a massive growth.
Since announcing its quarterly results on Nov. 3, Carvana (CVNA) – Get Free Report shares have lost 44% of their value and are currently trading at $8.06 versus $14.35 on that day. This translates into a decline in market capitalization of approximately $1.1 billion in two weeks. Carvana currently has a market value of $1.43 billion.
The company, founded in 2012 and based in Arizona, took advantage of favorable conditions to market its new way of buying a car. The group’s car vending machines stuck well with the pandemic, a period during which consumers wanted to avoid contact as much as possible, to limit their exposure to the virus.
The federal government had also flooded consumers with money via stimulus programs. Interest rates were almost zero, which meant that financing the purchase of a vehicle cost practically nothing.
Added to this, the supply chains of car manufacturers were disrupted, which made the production of new vehicles difficult. Faced with these challenges, consumers turned to the second-hand market as the waiting times for new vehicles were long. Used car prices therefore jumped, making it a good deal for Carvana.
Basically, all the winds were blowing in the right direction for the company.
New Car or Used Car?
But coming out of the pandemic, Carvana’s fortunes seem to have turned completely. The used car market remains hot. But all the other factors have reversed. There is no more stimulus money. The central bank is aggressively raising interest rates and inflation is at its highest in 40 years. The economy is also close to a recession more than ever, and the waves of job cuts follow one another. Used car prices remain high but financing the transaction has become very expensive for consumers. Supply chains have improved significantly, facilitating the production of new vehicles.
This was felt in the latest quarterly results from Carvana: In the third quarter, Carvana’s revenue fell 2.7% year-on-year to $3.4 billion, while net loss jumped to $283 million from just $32 million in the third quarter of 2021, the company said in a letter to shareholders.
Used car sales in the U.S. fell almost 13% year-on-year, in the third quarter of 2022.
“If you’re looking at newer used cars — models in the 1 to 3-year-old range, you may find that prices are still relatively close to what they sold for new,” Consumer Reports said. “If you have to borrow money to buy the car, it may be better to find a new car that can qualify you for a lower interest rate, to say nothing of the benefit of a fresh factory warranty. Many manufacturers subsidize financing and may offer interest rates that are much lower than normal to qualified buyers.”
All this complicates the affairs of Carvana, which had to go into $3.3 billion of debt to finance the acquisition of auctioneer Adesa’s physical auction business this year.
Elimination of 1,500 Additional Jobs
The group is therefore under enormous financial pressure.
“Significant nearer-term operational and financial risks for Carvana have emerged and are likely to cloud the CVNA investment story for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a note on Nov. 15, downgrading the stock.
He added that “we do not envision investors bidding CVNA meaningfully higher until prospects for a manageable and sustained capital base become clearer.”
Nagel seems to confirm that Carvana has a liquidity problem which the group must address fairly quickly if it wants to stop the collapse. The company has between $6 billion and $7 billion in debt net of the cash on the balance sheet, according to FactSet.
But Carvana is not profitable: its adjusted EBITDA margin loss increased by 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization,…
Read More: Collapse of Carvana, the ‘Amazon of Used Cars’, Continues