Heaven does not exude Karvana.
On the contrary, large clouds continue to gather over the company that has been one of the biggest winners in the COVID-19 pandemic, with exponential growth.
Since the quarterly results were announced on November 3, Carvana (CVNA) – Get a free report The shares have lost 44% of their value and are currently trading at $8.06 from $14.35 that day. This translates into a drop in market value of about $1.1 billion in two weeks. Carvana’s market capitalization is currently $1.43 billion.
The company, founded in 2012 and headquartered in Arizona, has taken advantage of favorable conditions to market its new way of buying a car. The group’s car vending machines have held up well with the pandemic, a period during which consumers wanted to avoid contact as much as possible, to limit their exposure to the virus.
The federal government has also dumped consumers money through stimulus programs. The interest rates were almost zero, meaning it cost practically nothing to finance the car purchase.
In addition, auto manufacturers’ supply chains were disrupted, making it difficult to produce new cars. Faced with these challenges, consumers turned to the used car market as waiting times for new cars were long. So used car prices jumped, making it a good deal for the Carvana.
Basically, all the winds were blowing in the right direction for the company.
New or used car?
But after emerging from the pandemic, Karvana’s fortunes seem to have turned around completely. The used car market is still hot. But all other factors have been reversed. No more stimulus money. The central bank is aggressively raising interest rates and inflation is at a 40-year high. The economy is also closer to recession than ever, and waves of job cuts follow one another. Used car prices are still high but financing a deal has become too expensive for consumers. Supply chains have improved significantly, facilitating the production of new vehicles.
This was shown in Carvana’s most recent quarterly results: In the third quarter, Carvana’s revenue fell 2.7% 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. he said in a letter to shareholders.
Used car sales in the United States fell nearly 13% year-over-year, in the third quarter of 2022.
“If you’re looking for newer used cars — models from 1 to 3 years old, you may find that the prices are still relatively close to what they sold for new,” Consumer Reports said. “If you have to borrow money to buy the car, it may be best to find a new car that can qualify you for 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 to eligible buyers.”
All of this complicates the affairs of Carvana, which had to enter $3.3 billion in debt to fund the acquisition of Adesa Auctioneers’ physical auction business this year.
The abolition of 1,500 additional jobs
Thus the group is under enormous financial pressure.
“Significant near-term operational and financial risks have emerged for Carvana that are likely to overshadow CVNA’s investment story for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a note on November 15, downgrading the stock.
“We do not envision investors bidding for CVNA meaningfully higher until the prospects for a manageable and sustainable capital base become clearer,” he added.
Nagel seems to confirm that Carvana has a liquidity issue that the group must address fairly quickly if it is to stop the crash. The company has between $6 billion and $7 billion net debt of cash on the balance sheet, according to FactSet.
But Carvana isn’t profitable: It increased its adjusted EBITDA margin loss by 6.2% in the third quarter. EBITDA stands for earnings before interest, taxes, depreciation, and amortization, which helps investors gauge a company’s financial health.
The company is struggling to try to turn things around and delay as much as possible raising capital or adding more debt. 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 affecting 8% of its workforce, or 1,500 employees.
“It’s fair to ask why this is happening again, however I’m not sure I can answer it as clearly as it deserves,” CEO Ernie Garcia told employees in an email Nov. 18. At least two workers. 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 companies selling expensive, often under-financed products where the buying decision can be as easily delayed as cars.”
In addition, “we failed to accurately predict how this would all happen and its impact on our business. As a result, we find ourselves here.”
The new cuts will affect “many corporate and technology teams as well as some operations teams as we eliminate roles, locations, or shifts to match our size with the current environment,” Garcia wrote.
After reaching out to TheStreet, Carvana did not comment.
Legal issues
The new job cuts come after global 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] It is expected to remain weak due to higher consumption of used cars and lower returns from the sale of loans and other products,” the ratings agency said. Carvana generates more than 50% of its GPU from selling loans and other products. With high interest rates, it is difficult for Carvana to compete with large banks that can keep loan rates low, which will reduce the number of loans allocated to Carvana.
Garcia ruled out the option to raise capital on November 3.
“Our goals will be to cut expenses and try to get positive EBITDA and debt amortization as quickly as possible,” he told analysts. “We have a portfolio of committed liquidity. We have a portfolio of real estate. And I think we feel that positions us well to weather this storm. And we’re making great strides within the company.”
But apart from these financial difficulties, Carvana also faces legal challenges. The company is facing lawsuits from clients in multiple states involving alleged issues over titles, registration, and vehicle purchases.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, with Carvana suing in return.
Carvana said the lawsuits were without merit and called the decision in Michigan “arbitrary.”
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