- The company dedicated to the sale of used cars is reportedly in a complex financial situation and experts are talking about a possible bankruptcy.
- The board has not pronounced the word “bankruptcy”, but many factors point to the fact that this could be the case.
- The company has ruled out a new round of fundraising and they assure that they have enough cushion support.
Despite a positive start to the year for the used car giant’s stock, its financial situation looks precarious. Carvana’s stock shares kicked off 2023 up 113%, but not everyone is convinced of the strength of that momentum. The company’s financial health shows no signs that this rally will be sustained over time.
At the start of the year, the stock went from $4.74 to $10.08 per share. However, the company had done absolutely nothing to bring about that rise. In other words, the analysis pointed to the fact that this was an unjustified increase given that the fundamentals had not changed. Nor had the company made any announcement that would have triggered investor interest.
Consequently, the impetus behind the stock surge was a “meme” wave. This term is used to define the coordinated actions of retail investors on social networks to pour capital into a stock. The purpose of this action is to make short-sellers lose money. The latter are dedicated to obtaining large profits by betting on the fall of company shares.
Carvana’s situation: a look at its numbers
But it is one thing to talk about Carvana’s bad situation and another to look at the magnitude of this bad moment. The used car dealer is in a fierce battle against the growing debts it is accumulating. In addition, the company closed 2022 with only $434 million in cash on hand.
Thus, what looked like a dream year 2023 is turning into a nightmare that is leading the group to crash into reality. Retail investor momentum could be diluted at any time due to strong macroeconomic conditions. On top of that, the legacy of 2022 reappeared more starkly. During the earnings call last February 23, the company highlighted that last year was a “very difficult” one.
The company’s board ratified:
“From a short-term perspective, it was clearly a very difficult year. After eight consecutive years of year-over-year improvement, it was the first year that we went backwards in key metrics.”
Specifically, the firm’s numbers are terrible. During the third quarter, sales fell a painful -23%. At the same time, profits slipped -24.4%. For every car it sold, the company lost about $7,400 and gross profit per unit fell by $2,219. The latter is half as much compared to gross profit in the same quarter last year.
In the same vein, Carvana burned through $1.8 billion in cash to be left with just $432 million at the end of 2022. As for its debt, it grew to $7 billion, which includes leases.
Other figures that highlight Carvana’s bad situation
The above is only part of the used car trader’s bad results. One of the most dramatic figures has to do with last year’s net losses. During 2022, the company recorded a net loss equivalent to $1.59 billion. To get a clear picture of that magnitude, it should be noted that the accumulated losses between 2014 and 2021 were $610 million.
In that six-year period, the company’s largest annual drop was $171 million in 2020. It is worth mentioning that this 2020 plunge was associated with the economic effects caused during the pandemic announcement.
But the pandemic also handed the company a good situation thanks to rising used car prices. Problems with the supply chain and chip shortages caused a drop in the supply of new cars. That led people to turn to used cars as an alternative. In the midst of that time of rising prices, the company opted to buy excess used cars in the hope of selling them at better prices.
However, conditions in the auto market normalized and the Federal Reserve announced rapid and aggressive rate hikes. As such, the high cost of borrowing and better deals from automakers drove people back into the new car market. As a result, Carvana was left with warehouses full of vehicles.
There are no plans to undertake new fundraising
The circumstances noted above and additional ones were listed during the call by the company’s CEO, Ernie Garcia. Although the executive did not name the word “bankruptcy,” many experts believe it is the elephant in the room, notes The Street.
The businessman stressed that the company is doing everything possible to reduce losses and costs. In that sense, one of the plans would consist of buying fewer cars to focus on the sales of the ones they own. This would seek to compensate for the slowdown in sales. In other words, the company is betting on selling more cars than it buys.
At the same time, the company expects to cut annual costs by about $100 million by 2023. Garcia also ruled out the possibility of undertaking financing rounds, at least for the time being. On that subject, he said that Carvana “has many options”. One of the ones that would give the company the most peace of mind are asset holdings in the real estate sector.
“I think we have access to capital in many forms. Obviously, we have a lot of very high-quality real estate holdings. We have about $2 billion in real estate,” he said.
It should not be lost sight of that the used-car vending machine company has, in addition to the $432 million in cash, another $1.5 billion in committed facilities. However, this support is not enough to dispel analysts’ doubts about the state of the company’s finances.
At the time of writing, the company’s shares on the stock exchange are trading up $9.57%. This is an increase of 7.22% at the close of trading on February 28.
Is it advisable to invest in Carvana?
Taking into consideration the landscape of the company’s conditions, investing in its shares is not a recommendable option. It all depends on the risk tolerance of investors. In other words, Carvana’s shares could lead to a total loss of capital.
Not to be overlooked is the fact that this firm’s shares were passing $50 in August last year. By 2023, macroeconomic conditions are expected to worsen and the U.S. economy could end up in a recession.
Such circumstances would mean tighter monetary policy from the central bank, which means greater difficulty in borrowing. As you might expect, that’s not good for the used car business.
This paper is for informational purposes only and cannot be assumed to be advice or an invitation to invest.
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