Carvana Co. (NYSE:CVNA)
We warned investors to avoid Carvana Co. (NYSE:CVNA) stock in October of last year, describing it as a “car disaster” since the firm has entered a time of major upheaval under heavy debt with seemingly no clear routes out.
A stock that was once worth $360 in 2021 has dropped by more than 95% in only a year, illustrating the astounding boom-bust cycle experienced by the corporation.
Some Context
Carvana’s 2017 initial public offering (IPO) failed because the firm lost a lot of money, and investors were reluctant to shoulder the company’s losses. Transparent pricing, 360-degree imaging technology, and expedited delivery contributed to the revolutionary business model’s allure (either pick-up from high-profile vending machines or delivery at home).
The company’s expansion was first fueled by the promise of a streamlined car-buying process characterized by a greater range of options, standardized evaluations of quality, and less inconvenience. The firm expanded swiftly, with 2016 revenues of $365 million, a relatively tiny sum compared to the $700 billion used-vehicle industry at the time, produced by about 40 million transactions.
When it went public in 2017, the firm was valued at $2 billion. Shares opened at $15 but dropped to $11 on the first trading day. This was implemented at a company whose revenues increased by 180 percent to $360 million, even though it made a mere 19 million in gross profit and had massive operational losses of $92 million. It was concerning that the burn rate was above $200 million since it was obvious that losses were to be anticipated for some time. Nevertheless, the market soon forgot about these worries.
Looking forward to the pandemic year of 2020, the firm has raised revenues by as much as 42%, to $5.6 billion, with gross profits rising to $794 million, or 14% of sales. While the company’s operational losses increased after the IPO, they were still just $462 million.
Revenue increased by 130% to $12.8 billion in 2021 due to the pandemic, with gross earnings increasing to $1.9 billion and operational losses shrinking to $286 million. Despite the company’s fantastic sales success, which drove the stock price to more than $300 and increased its market worth to $50 billion by the late summer of 2021, warning signs began to appear. The firm was in precarious financial shape with an asset base of about $7 billion and only $500 million in equity. Furthermore, the increased confidence in the stock price prompted the firm to announce a multibillion-dollar transaction for ADESA’s physical auction arm, marking the company’s entry into physical auctions.
When investors worried about the effects of interest rate rises on the corporation, share prices dropped from $100 in the winter of 2021 to $30 in the spring of 2022. When the business finalized the ADESA transaction in May, first-quarter revenues increased by 56% to $3.5 billion. Still, margins were down slightly. The company faced a large $506 million loss due to reduced gross margins and greater expenses.
Although the business’s second-quarter revenue growth slowed to 16% to $3.88 billion, and its gross margins remained stable at 10%, the company’s $438 million operating loss was enormous, especially considering that it managed to turn an operating profit in the same period a year earlier.
Although the firm was only worth $2.8 billion as of the end of October, it was still significant given that it burned through around $2 billion a year, there was no shareholder ownership, financing was growing costly, and used care prices were falling. If the Federal Reserve were to change course or act as a white knight, it would be the best-case scenario for investors. Nevertheless, investors should be more worried about issues of liquidity and insolvency instead.
Stumbling Along
Carvana stock has been decreasing steadily since October, hitting a low of $3 and changing early this year. After a brief momentum runs to $15 in February, the price has since fallen back to $7.
The business reported its quarterly financial results in November, and the numbers showed a decline in sales of 3% to $3.39 billion. It’s important to remember that ADESA is a part of this picture since it shows that sales trends would have been significantly lower without ADESA’s help. Even if interest costs are already accounted for in Carvana’s definition of operating loss, their size increased to $508 million. Although loan rates and the amount borrowed increased, interest costs for the quarter were $153 million, a considerable sum steadily growing.
Fourth-quarter sales dropped to $2.84 billion as an operational loss of $1.44 billion was recorded due to a goodwill impairment charge of $847 million and other operating losses of roughly $600 million. The rise in interest rates and the accompanying squeeze on gross margins mean that cost-cutting measures have little effect. With $8 billion in net debt and quickly rising interest expenditures, there is no quick way out, especially because the first quarter of 2023 offers just a handful of reasons to be optimistic.
Conversely, Carvana Co. reported 7-week retail sales of 5,600 units, which is encouraging given that March is typically a prosperous month despite the tax refund shortfall. This suggests that in the first quarter, unit sales and revenue for this crucial business unit are anticipated to rise from the previous three-month period.
As of the second quarter of 2023, Carvana Co. anticipates a $100 million decrease in selling, general, and administrative expenditures, which should provide some operational leverage (compared to the final quarter of 2022). Higher interest costs and the possibility that March may not go as planned due to turbulence in financing markets, which is also crucial for Carvana, would negate such a feat.
Considering these trends, it’s hard to see why anybody would want to invest in Carvana stock.
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