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Pandemic darling Carvana (CVNA 1.81%), known for its car vending machines and convenient delivery options, has completely fallen out of favor with Wall Street analysts. The stock was a market favorite in 2020 and much of 2021, soaring above $300 per share despite chronic losses. Shares now trade for around $5, down nearly 99% from their all-time high.
Formerly bullish analysts are finally waking up to the fact that Carvana is in serious trouble. Recent downgrades include:
Carvana is being hit by a perfect storm. Retail unit volumes are declining as demand for used cars drops, and gross profit per unit is falling off a cliff as used car prices normalize. Meanwhile, Carvana’s costs are too high, and its balance sheet is a debt-ridden mess.
In the third quarter, Carvana saw unit volumes slump 8% year over year and gross profit per retail unit plunge 25%. Overall gross profit fell 31%, leading to a net loss of over $500 million. Free cash flow over the first nine months of 2022 was a loss of over $1 billion.
Carvana’s balance sheet is not capable of absorbing this for much longer. The company had just $316 million in unrestricted cash at the end of September, and it had over $7 billion of debt. Interest payments totaled $153 million in the third quarter alone, eating up nearly half of the company’s gross profit.
Carvana’s 10 largest creditors signed an agreement earlier this week to cooperate in any negotiations with the company, a possible sign that they’re preparing for the company to file for bankruptcy or seek to restructure its debt. Carvana may be capable of dragging things out for a while – the company can slash costs and generate cash by drawing down its inventory. But unless the used car market dramatically improves, the company’s debt burden appears insurmountable.
The bond market certainly doesn’t see much hope. Carvana notes issued in 2020 that mature in 2028 are currently going for around 34 cents on the dollar. If Carvana does end up going through bankruptcy, shareholders will likely get next to nothing. Carvana’s shareholder equity is barely positive, and it falls into negative territory if you back out the goodwill on the balance sheet.
Carvana is too fragile to withstand a prolonged downturn in the used car market. The company focused on growing as quickly as it could during the first two years of the pandemic, making questionable moves like the $2.2 billion acquisition of ADESA U.S.’ auction business. Debt ballooned by billions of dollars as a result.
“Difficult periods feel endless when we are in them. They aren’t fun. They aren’t easy. But they do end,” said Carvana CEO Ernie Garcia in the third-quarter letter to shareholders. That’s certainly true, but you must be able to survive until the end. On this front, the odds are stacked against Carvana.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Timothy Green has positions in Bank of America. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Bank of America. The Motley Fool has a disclosure policy.
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