The sky is not clearing for Carvana.
On the contrary, big clouds continue to gather over the company, one of the biggest winners of the covid-19 pandemic, with massive growth.
Since announcing its quarterly results on November 3, Carvana (CVNA) – Get a Free Report shares have lost 44% of their value and are currently trading at $8.06 versus $14.35 on the day. That translates into a drop in market capitalization of about $1.1 billion over two weeks. Carvana currently has a market cap of $1.43 billion.
Founded in 2012 and based in Arizona, the company has taken advantage of favorable conditions to market a new way to buy a car. The group’s car vending machines have stuck well through the pandemic, a time when consumers want to avoid contact as much as possible to limit their exposure to the virus.
The federal government also pumped money into consumers through stimulus programs. Interest rates were almost zero, which meant that financing the purchase of a vehicle cost virtually nothing.
In addition, automakers’ supply chains were disrupted, making it difficult to produce new vehicles. Faced with these difficulties, consumers turned to the second-hand market because of the long waiting period for new cars. Because of this, used car prices have gone up, 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?
However, after the pandemic, the fate of Carvana changed completely. The used car market remains hot. But all other factors were reversed. No more stimulus money. The central bank is aggressively raising interest rates and inflation is at a 40-year high. The economy is also closer than ever to recession, and waves of job cuts follow one another. Used car prices remain high, but financing the transaction has become too expensive for consumers. Supply chains have improved significantly, making it easier to produce new cars.
This was reflected in Carvana’s latest quarterly results: In the third quarter, Carvana’s revenue fell 2.7% year-over-year to $3.4 billion, while its net loss widened to $283 million from just $32 million in the third quarter of 2021. said in his letter to the shareholders.
US used car sales fell almost 13% year over year in the third quarter of 2022.
“If you’re looking at newer used cars — models that are 1 to 3 years old — you may find that prices are still relatively close to what they sell for new,” Consumer Reports said. “If you have to borrow money to buy a car, you may be better off finding a new car that can qualify you for a lower interest rate, to say nothing of the benefit of a new factory warranty. Many manufacturers subsidize financing and may offer more than normal for qualified buyers. lower interest rates.”
All this complicates things for Carvana, which this year had to take on $3.3 billion in debt to finance the purchase of auctioneer Adesa’s physical auction business.
1500 Cancellation of Overtime
For this reason, the group is under great financial pressure.
“Significant near-term operational and financial risks have emerged for Carvana and are likely to cloud the CVNA investment story for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a Nov. 15 downgrade note on the stock.
He added that “we do not expect investors to meaningfully overvalue CVNA until the prospects for a manageable and sustainable capital base become clear.”
Nagel confirms that Carvana has a liquidity problem that the group needs to address fairly quickly if it is to stop the collapse. The company has between $6 billion and $7 billion in debt, net of cash on the balance sheet, according to FactSet.
But Carvana isn’t profitable: its adjusted EBITDA margin rose 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors gauge a company’s financial health.
The company is trying to turn things around and delay raising capital or adding more debt as long as possible. For example, Carvana is determined to cut costs dramatically. After cutting 2,500 jobs in May, the company announced a further wave of layoffs covering 8% of its workforce, or 1,500 workers.
“It’s fair to ask why this is happening again, but I’m not sure I can answer that as clearly as you deserve,” CEO Ernie Garcia told employees in a Nov. 18 email. at least a few factors. First, the economic environment continues to face headwinds and the immediate future is uncertain. This is especially true for fast-growing companies and businesses that sell expensive, often financed products where a purchase decision can be made. easily delayed like cars.”
Furthermore, “we couldn’t predict exactly how all of this would play out and the impact on our business. As a result, we find ourselves here.”
The new layoffs “will affect many corporate and technology teams, as well as some operations groups, where we are eliminating roles, locations or relocations to adapt our size to the current environment,” Garcia wrote.
Carvana had no comment when reached by TheStreet.
The new job cuts come after rating agency S&P Global Ratings warned that it would downgrade Carvana in the near term and change its outlook from stable to negative.
“GPU [gross profit per unit] is expected to remain weak due to higher attrition rates and lower revenues from sales of loans and other products,” the rating agency said. “Carvana derives more than 50% of its GPU from sales of loans and other products. With interest rates rising, it is more difficult for Carvana to compete with the big banks, which can keep loan rates low, which will reduce the number of loans available to Carvana.”
Garcia ruled out the capital increase option on November 3.
“Our goals will be to reduce costs and try to get to positive EBITDA as quickly as possible,” he told analysts. “We have a bunch of committed liquidity. We have a bunch of real estate. And I think that puts us in a good position to ride out this storm. company.”
But in addition to these financial difficulties, Carvana is also facing legal problems. The company faces lawsuits in multiple states related to customer names and registrations and alleged vehicle purchases.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license and sued Carvan in return.
Carvana said the allegations were baseless and called the decision in Michigan “arbitrary.”