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Shares of Carvana (CVNA -1.98%) continue their skid into the ditch Monday morning with the stock falling 6.3% as of 10:57 a.m. ET.
While there was no company-specific news today to account for the sell-off, fears for the online used car dealer continue to mount. Bloomberg reported last week Carvana’s lenders were banding together to work together in the event the dealer goes belly-up. Some 70% of the creditors, representing $4 billion in loans, have agreed to the strategy.
Image source: Getty Images.
The used car bubble is bursting. After a year or so of ever rising prices, the market is turning as prices fall and inventory shortages ease. While that ought to signal a bullish environment after the auto industry was unable to match demand, the Federal Reserve has been ratcheting up interest rates at an unprecedented level, making borrowing for a car significantly more expensive.
It also makes Carvana’s own debt load heavier. The used car dealer has $6.6 billion worth of long-term debt on its balance sheet, about half of which was issued earlier this year to finance its ill-timed acquisition of auction house ADESA.
Carvana has $316 million in unrestricted cash available. Jefferies analyst John Colantuoni believes Carvana will run out of money by the first quarter of 2023.
Sales are falling for Carvana, gross margins are plunging, and its inventory of available vehicles is contracting. That’s a problem because fewer cars means potential buyers will have a more difficult time matching up with one to purchase. It seems like a situation that will continue to feed on itself until Carvana crashes and burns in bankruptcy.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group. The Motley Fool has a disclosure policy.
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