Why are investors jumping off the Carvana bandwagon?

Ernie Garcia, CEO, Carvana

Scott Mill | CNBC

Detroit – last year, Carvana CEO and Co-Founder Ernie Garcia went on a triumphant tour.

He touted the company’s “notable” second-quarter results on August 5, 2021 which included the used car retailer’s first quarterly net profit. He then recalled the rapid growth of “a group of ambitious kids with a tremendous amount of learning” in the Fortune 500.

It is now clear that company executives still need to learn more. Since then, the rise of the Carvana fairy tale has turned into a nightmare for investors amid rising interest rates, inflation and self-inflicted wounds.

Since Garcia’s comments last year, the company’s stock has fallen from an all-time high of nearly $377 per share, hit in August of last year after that outstanding quarter, to at least $6.50 a share this week — down 98 %. Carvana has fallen from a market capitalization of $60 billion to $2.2 billion after a small rally ending this week.

The stock rose more than 30% Thursday, followed by a 19% increase to $11.88 per share on Friday amid a broader market recovery and potential short selling pressure.

But it’s been an ongoing streak of bad news and financial results since the stock’s peak, raising concerns among investors about the company’s long-term trajectory. It also has little cash on hand and $6.3 billion in debt, including $5.7 billion in old bonds.

Carvana has consistently borrowed money to cover its losses and growth initiatives, including a $2.2 billion all-cash acquisition earlier this year of ADESA’s US physical auction business from Car International.

“We think CVNA is far from out of the woods, even when the industry is down, we don’t see a V-shaped recovery,” JPMorgan analyst Rajat Gupta wrote in a note to investors on Tuesday. The company lowered its forecast for earnings and free cash flow for the company.

Morgan Stanley last week withdrew its rating and target price for the stock. Analyst Adam Jonas pointed to the deterioration in the used car market and the volatile financing environment for change.

Management slips

Carvana has grown exponentially during the coronavirus pandemic, as shoppers have switched to online purchases rather than visiting a dealership, with the promise of hassle-free buying and selling of used vehicles at the customer’s home.

But Carvana did not have enough vehicles to meet the increase in consumer demand or the facilities and employees to process the vehicles it had. This prompted Carvana to buy ADESA and a record number of vehicles amid skyrocketing prices as demand slows amid rising interest rates and recession fears.

“We built more than our backs” — sending the stock down 37% over the following week, Garcia said during an earnings call on April 20.

During its first-quarter earnings report, the company was criticized for spending too much on marketing, which included a lackluster 30-second Super Bowl ad, and for failing to prepare for a potential slowdown or slump in sales.

religion

Then there is the Carvana debt.

The company’s bonds touched all-time lows this week, burning liquidity and facing rising borrowing costs.

The Wall Street Journal reported on Wednesday that the company’s long-term bonds have fallen to distressing levels, with some now trading at 33 cents on the dollar. Its bond yield was 10.25%, more than 30% as of Tuesday, according to MarketAxess, a sign that Carvana will struggle to borrow from bond markets for now.

Morgan Stanley cited the company’s debt and uncertain financing outlook in withdrawing the rating and target price for the stock. “The deterioration in the used car market combined with the volatile interest rate/financing environment” has created “material risks” to the company, Jonas said.

Jonas issued a new base case set for Carvana of between $1 per share and $40 per share over the next 12 months.

Pricing pressures

The used-car market is on pace to end the year down more than 12% from the 40.6 million used cars sold in 2021, according to a mid-October estimate from Cox Automotive. Carvana’s sales during the third quarter of this year were up 4% compared to 2021, but it was significantly less profitable than the previous year and was lower on a quarterly basis.

Carvana’s third-quarter sales fell 8% from a year earlier, while earnings per vehicle sold were down 25% to $3,500. CEO Garcia described the end of the third quarter as “the most unsustainable point ever” for customers who are financing a car purchase.

“Carvana has revolutionized the automotive industry with a proven e-commerce model serving millions of satisfied customers, and while the current environment and market has drawn attention in the near term, we continued to gain market share in the third quarter, and remain focused on our profit-making plan. , while making the best car buying and selling experience even better available,” a company spokesperson said in a statement.

Used car prices are down 2.4% since last month

The declines came amid lower wholesale prices for new cars. The Mannheim Used Car Value Index, which tracks the prices of used cars sold at US wholesale auctions, is down 15.4% this year through October after peaking in January, including a 2.2% drop from September to October.

Retail prices usually follow changes in wholesale. This is good news for potential car buyers, but not great for companies like Carvana that have bought cars at their highest and are now trying to sell them at a profit.

Used car prices have held steady so far, but this may not last long, as wholesale costs continue to fall.

“They don’t want to sell low,” said Chris Fry, director of industry insights at Cox Automotive. “That’s why we don’t see prices coming down that much in retail.”

Affordability

Fry noted that vehicle affordability continues to decline, with car loan rates hitting a 15-year high despite slightly lower rates. The average used list price for a used car is stabilizing, but it’s still near record highs at more than $28,200, according to Cox Automotive.

“We’ve seen the impact of the slowdown in retail sales, and a lot of it has to do with affordability,” Frey said. “The affordability aspect, coupled with these higher prices is starting to affect sales rates.”

The competition also catches up with Carvana. During the coronavirus pandemic, licensed car dealers have been like automation They were forced to start selling vehicles online while showrooms closed and consumers turned away from dealerships. The traditional Carvana competitors are beginning to deliver on their same promise of buying a car online hassle-free.

“They took a lot, roughly, of air from the Carvana balloon,” Fry said.

CNBC’s Michael Bloom contributed to this report.

This is behind the Carvana accident

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