The sky does not clear for the Caravan.
On the contrary, big clouds continue to gather over the company, which was one of the big winners of the Covid-19 pandemic, with tremendous growth.
After announcing its quarterly results on November 3, Carvana (CVNA) – Get a free report the stock has lost 44% of its value and is currently trading at $8.06, down from $14.35 that day. That translates into a drop in market cap of roughly $1.1 billion in two weeks. Carvana currently has a market cap of $1.43 billion.
Founded in 2012 and based in Arizona, the company is taking advantage of favorable conditions to launch its new way of buying a car. The group’s car vending machines have weathered the pandemic well, a period when consumers wanted to avoid contact as much as possible to limit their exposure to the virus.
The federal government had also flooded consumers with money through stimulus programs. Interest rates were almost zero, which meant that it cost almost nothing to finance the purchase of a vehicle.
In addition, car manufacturers’ supply chains were disrupted, making it difficult to produce new vehicles. Faced with these challenges, consumers turned to the second-hand market as the waiting time for new vehicles was long. Consequently, used car prices have soared, 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?
But coming out of the pandemic, Karvana’s fortunes seem to have completely turned around. The used car market remains hot. But all other factors have reversed. No more stimulus money. The central bank is aggressively raising interest rates and inflation is the highest in 40 years. The economy is also close to a recession more than ever before and waves of job cuts follow one after the other. Used car prices remain high, but financing the deal has become very expensive for consumers. Supply chains have improved significantly, making it easier to produce new vehicles.
This was felt in Carvana’s most recent quarterly results: In the third quarter, Carvana’s income fell 2.7 percent year over year to $3.4 billion, while net loss jumped to $283 million from just $32 million in the third quarter of 2021, the company said in a letter to shareholders.
US used car sales fell nearly 13% year over year in the third quarter of 2022.
“If you’re looking at newer used cars – models 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 the car, you might be better off finding a new car that can get you a lower interest rate, not to mention the benefit of a new factory warranty.” Many manufacturers subsidize financing and may offer interest rates that are much lower than normal for qualified buyers.”
All that complicates matters for Carvana, which had to take on $3.3 billion in debt to finance the acquisition of auctioneer Adesa’s physical auction business this year.
Eliminate 1,500 additional jobs
The group is therefore under enormous financial pressure.
“Significant near-term operational and financial risks have emerged for Carvana and are likely to cloud CVNA’s investment history for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a Nov. 15 note, downgrading the stock.
He added that “we do not foresee investors bidding significantly higher for CVNA until the outlook for a manageable and sustainable capital base becomes clearer.”
Nagel seems to confirm that Carvana has liquidity a problem the band needs to fix pretty quickly if they want to stop the collapse. The company has between $6 billion and $7 billion in debt net of cash the balanceaccording to FactSet.
But Carvana isn’t profitable: Its adjusted EBITDA margin loss widened 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors assess a company’s financial health.
The company is scrambling to try to turn things around and delay raising equity or adding more debt as long as possible. Carvana, for example, is determined to cut costs dramatically. After cutting 2,500 jobs in May, the company just announced an additional wave of layoffs that affects 8 percent of the workforce, or 1,500 employees.
“It’s fair to ask why this is happening again, and yet I’m not sure I can answer as clearly as you deserve,” CEO Ernie Garcia told employees in a Nov. 18 email. “I think there are at least a couple of factors. The first is that the economic environment continues to face strong headwinds and the immediate future is uncertain. This is especially true for fast-growing companies and for businesses that sell expensive, often financed products, where the purchase decision can be as easily delayed as cars.”
In addition, “we were unable to accurately predict how all of this would play out and the impact it would have on our business. As a result, we end up here.”
The new cuts will affect “many enterprise and technology teams, as well as some operations teams where we are eliminating roles, locations or shifts to match our size with the current environment,” Garcia wrote.
Reached by TheStreet, Carvana had no comment.
The new job cuts come after ratings agency S&P Global Ratings warned it was likely to downgrade Carvana in the near term, changing the outlook from stable to negative.
“GPU [gross profit per unit] is expected to remain weak due to higher used car depreciation rates and lower returns from the sale of loans and other products,” the rating agency said. “Carvana generates over 50% of its GPU from the sale of loans and other products. With interest rates rising, it’s harder for Carvana to compete with the big banks, which can keep lending rates low, which will reduce the number of loans made to Carvana.”
Garcia ruled out raising capital on Nov. 3.
“Our objectives will be to reduce costs and try to achieve 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 we feel that puts us in a good position to ride out this storm. And we’re making great moves inside a trading company.”
But in addition to these financial difficulties, Carvana also faces legal challenges. The company faces lawsuits from customers in multiple states involving alleged problems with ownership and vehicle registration and purchase.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, with Carvana suing in return.
Carvana said the lawsuits are without merit and called the Michigan ruling “arbitrary.”