Concerns are mounting about Carvana, the “Amazon of used cars”.
The company has been an investor darling during the pandemic. They welcomed the new economy that wanted consumers to buy everything online: groceries, office equipment, transport tickets, meals, clothes, houses and cars.
Carvana (CVNA) – Get a free report was a pioneer in the new way of buying and selling vehicles with his model of automatic machines.
The group also benefited from disruptions in vehicle manufacturers’ supply chains, which had led to a large imbalance between supply and demand for cars at the expense of supply. As a result, car prices had risen sharply, making used cars price competitive with new cars. Interest rates were also near zero, which had a double advantage for Carvana. Funding a consumer vehicle purchase was easy, and Carvana was also able to use the credit market to fund its expansion. The company has thus incurred five debts during the pandemic.
But the situation has turned against Carvana, who now faces a perfect storm. Interest rates have risen rapidly, making car financing more expensive. Supply chain problems persist while 40 years of high inflation threatens to push the economy into recession, making consumers more cautious.
The stock keeps falling
As a result, rising interest rates should prompt consumers to reconsider their shopping habits before rushing into a car loan, said Edmunds.com car buying experts.
“The last time interest rates were this high, at least consumers could count on lower vehicle prices and greater inventory choice to soften the blow. That’s simply not the case in this market,” said Jessica Caldwell, Executive Director by Edmunds of Insights.
The average transaction price for a used vehicle fell to $30,045 in October 2022, compared to a peak of $31,095 in April 2022, but still represents a 4.7% increase from October 2021, Edmunds says. The average annual percentage rate (APR) on a used car purchase rose to 9.6% in October 2022, compared to 7.4% in October 2021, the highest since February 2010.
CEO Eric Garcia admitted last week that Carvana had misjudged market developments.
“We couldn’t predict exactly how this would all play out and what impact it would have on our business. As a result, here we are,” Garcia told employees in an internal memo, announcing the shedding of 1,500 jobs, or 8% of the company’s workforce. This is the second wave of job cuts after cutting 2,500 jobs in May.
But investors don’t think the cost cuts will be enough to revive the group, whose third-quarter net loss jumped to $283 million from $32 million in the year-ago period. That’s the message they’re sending with the liquidation of Carvava stock. The group’s share price fell 13.71% to $6.95 on Nov. 21. This resulted in a $200 million drop in market value between two trading sessions.
Since the beginning of the year, Carvana shares have lost 97% of their value, representing a $40 billion loss in market value.
“With a deteriorating outlook, cash burn will remain high and liquidity will deteriorate,” Wedbush analyst Seth Basham wrote in a note to clients. He believes Carvana is burning cash too quickly due to adjusted EBITDA losses as well as high interest payments.
The company will then likely raise cash in the coming months, likely through sale-leasebacks or the outright sale of about $2 billion of its own real estate, to fund its business through 2023.
S&P Global Ratings has warned against downgrading Carvana in the near term and changing the outlook from stable to negative.
“GPU [gross profit per unit] expected to remain weak due to higher depreciation rates for used cars and lower returns from sales of credit and other products,” the rating agency said. “Carvana generates over 50% of its GPU from sales of credit and other products. As interest rates rise, it will become more difficult for Carvana to compete with the big banks, which can keep lending rates low, which will reduce the number of loans Carvana is allocated.”
But Garcia ruled out the possibility of raising capital on November 3.
“Our goals will be to reduce expenses and achieve positive EBITDA as soon as possible,” he told analysts. “We have a lot of committed liquidity. We have a lot of real estate. And I think we feel that puts us in a good position to weather this storm. And we’re making great strides within society.”
EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors gauge a company’s financial health.
The Company reported $316 million in cash and cash equivalents as of September 30, compared to $403 million as of December 31.
Carvana did not respond to TheStreet’s requests for comment.