- Shares of Carvana plummeted after the company announced worse-than-expected financial results for the third quarter.
- The higher cost of borrowing has hurt the used sales market, with people thinking twice about financing a vehicle now due to the increased costs.
- The revenues came in at $3.39 billion, much lower than the $3.71 billion analysts were expecting. The quarter’s net losses increased from $32 million to $283 million year-over-year.
There was a point when used car prices took flight, it was difficult to even get your hands on a new set of wheels due to supply chain issues during the pandemic. In a surprising turn of events, it looks like that has all changed. While Carvana had a rapid rise to success, the tide has quickly turned for the company as they dropped around 98% from an all-time high recently.
Carvana Co. (CVNA) is the leading e-commerce platform for buying and selling used vehicles online, and the company has seen its stock crash abruptly. We’re going to look at why Carvana’s stock crashed and what to expect moving forward.
Carvana’s recent earnings report
Carvana announced its earnings report for the third quarter on November 3, and the results were much worse than analysts had anticipated. Here are some of the key financial highlights from the report:
- Carvana reported revenue of $3.386 billion, down 2.7% year-over-year and about $300 million lower than analyst estimates.
- The company had a loss of $2.67 per share compared to a loss of $0.38 from the same period a year ago.
- Retail units sold were 102,570, down 8.4% year-over-year.
- The total gross profit per unit was $3,500.
- Total gross profit was $359 million, down 31.4% from one year ago.
- SG&A expenses were $656 million, up 20.1%.
The rising costs of borrowing money and overall uncertainty about the economy are hurting auto retailers right now since they can’t offer cheap loans to consumers. CEO and cofounder of Carvana Ernie Garcia stated that the used car retailer is preparing for lower demand and higher depreciation. Garcia most notably had the following to say during the earnings call:
“We are building our plans around assumptions that the next year is a difficult one in our industry and the economy as a whole.”
Caravana’s stock immediately crashed after the earnings report when the company had its worst trading day ever by falling 39%.
Why did Carvana’s stock crash?
The Carvana stock has a 52-week range of $6.50 – $304.33. It’s uncommon to see a stock go from trading in the $300s to the single digits in one year.
So what exactly happened with Carvana?
Carvana deemed a $1 stock
Adam Jonas, an analyst from Morgan Stanley, stated that he was pulling his $68 price target for Carvana and that the company may now be worth as little as $1 a share. This new price target comes from the company’s poor financial results along with the current economic environment where the used-car market is dropping. At the same time, interest rate hikes continue to impact consumer spending.
Carvana’s poor financial results
In light of the earnings miss, many investors are pointing to the balance sheet as they worry about the company’s long-term growth. Carvana doesn’t have much cash on hand, and they have $6.3 billion in debt, including $5.7 billion in senior notes. The company has consistently borrowed money to cover losses. They’ve also borrowed money in the past for growth plans as they finance. The most shocking aspect of the earnings report is the amount of cash the company has burned through. Carvana’s cash and equivalents totaled $1.05 billion in its second quarter this year, it now has just $316 million left.
The revenues came in at $3.39 billion, much lower than the $3.71 billion analysts were expecting. The total net losses increased from $32 million to $283 million year-over-year. It was just simply too much bad news for investors.
The gross profit per unit numbers were a cause for concern
Even though many of the financial figures announced were a colossal disappointment, what might have been the worst news of all was the gross profit per unit that fell from $1,172 to $3,500. Since this is the key metric driving profitability, it’s clear that used car prices have continued to decline, which means that the company is sitting on inventory that’s dropping in value. There are worries that the gross profit per unit numbers could continue to drop as interest rates go up.
Carvana didn’t prepare for the economic downturn
While the company thrived during the pandemic when there was stimulus money circulating in the economy and folks were looking for online shopping options, they didn’t take the necessary measures to prepare for the rate hikes. The company was flying high after more accessible shopping from home led to a surge in sales; however, the company didn’t have enough vehicles to keep up with consumer demand, leading them to purchase ADESA and a record amount of used cars at an unlucky time, as demand started to slow from loan rate hikes.
The company faced criticism for the amount of money they were spending on marketing, including a Superbowl ad that many felt was underwhelming considering the platform. It’s clear that Carvana has burned through too much cash during a challenging time in the economy.
What’s happening with used cars?
According to the Manheim Used Vehicle Value Index, used car prices have dropped 10.6% year-over-year. The pandemic was the perfect time for the auto industry as they could offer low financing to consumers looking to use some of their stimulus money to invest in a vehicle. There was a period during the pandemic when it was almost impossible to even get your hands on a new set of wheels. Now vehicle prices are dropping as interest rates shoot up with the fears of a potential recession also impacting consumer spending.
Since Carvana only sells used vehicles, the business model is based on buying cars for less than it sells them for. An estimated 55% of used car buyers take out a loan to get behind the wheel. With auto loan rates reaching a 15-year high, rising interest rates will deter many from financing such a large purchase right now.
With declining used car prices, the value of Carvana’s inventory is dropping as you read this. If the current decline in used car prices continues, this will significantly cut Carvana’s profit margins.
What’s next For Carvana?
Investors are concerned that the company is sitting on billions of dollars worth of depreciating assets, burning cash in a time of economic uncertainty.
Management predicted that the retail units sold and gross profits per unit will drop in the fourth quarter. This is disappointing as analysts were initially looking for an increase in total revenue to $3.76 billion. It doesn’t look like Carvana will reach this number. There are actually fears that the company will go bankrupt. The shockingly low levels of cash on hand combined with the economic climate make it unlikely the company could stabilize in the near future.
Carvana’s ace in the hole is that they have access to $4.4 billion available liquidity through a short-term credit facility and unpledged assets, including things like real estate and vehicle inventory. They could tap into this if they have to borrow more money to get through the coming quarters.
In the company’s official earnings report, the auto retailer didn’t even give a quantitative forecast for 2023 because they felt that the current environment makes it challenging to do so accurately. In the morning hours of November 14, shares of Carvana were down around 14% as the company struggled to gain investor confidence.
How should you be investing?
Many of these pandemic success stories are now experiencing a fall from grace as consumer spending habits shift to adjust to higher interest rates. This means that there’s plenty of volatility in the stock market, making it challenging to find the best investments for your situation.
The bottom line
Will Carvana become a $1 stock? Will the company bounce back when the economy returns to normal? Only time will tell how the used car retailer will navigate this difficult economic time. The short-term outlook doesn’t look promising for Carvana with massive sell-offs continuing as they struggle to regain investor confidence.
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