The sky is not clearing for Carvana.
On the contrary, big clouds continue to gather over the company that was one of the big winners of the covid-19 pandemic, with tremendous growth.
Since the announcement of the quarterly results on November 3, Carvana (CVNA) – Get a free report shares have lost 44% of their value and are currently trading at $8.06 versus $14.35 on that day. This translates to a drop in market cap of about $1.1 billion in two weeks. Carvana currently has a market value of $1.43 billion.
Founded in 2012 and based in Arizona, the company took advantage of favorable terms to market its new way of buying cars. The group’s vending machines held up well during the pandemic, a period when consumers sought 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. The interest was almost zero, which meant that financing the purchase of a vehicle cost practically nothing.
In addition, automakers’ supply chains were disrupted, making new vehicle production more difficult. Faced with these challenges, consumers turned to the used market as waiting times for new vehicles were long. Used car prices rose as a result, making it a good deal for Carvana.
In short, all winds were blowing in the right direction for the company.
New car or used car?
But now that she’s coming out of the pandemic, Carvana’s fortunes seem to have turned completely. The used car market remains hot. But all other factors are reversed. There is no more stimulus money. The central bank is aggressively raising interest rates and inflation is at its highest level in 40 years. The economy is also closer than ever to a recession and waves of job losses follow one another. Used car prices remain high, but financing the transaction has become very expensive for consumers. Supply chains have been significantly improved, facilitating the production of new vehicles.
This was felt in Carvana’s latest quarterly results: In the third quarter, Carvana’s sales fell 2.7% year-over-year to $3.4 billion, while net loss rose to $283 million from just $32 million in the third quarter of 2021. said in a letter to shareholders.
US used car sales fell nearly 13% year-on-year in the third quarter of 2022.
“If you look at newer used cars — models in the 1- to 3-year-old range — you’ll find that prices are still relatively close to what they sold for new,” said Consumer Reports. “If you need to borrow money to buy the car, it might be better to find a new car that qualifies you for a lower interest rate, not to mention the benefit of a new factory warranty. Many manufacturers subsidize financing and can offer interest rates that are much lower than normal for qualified buyers.”
All this complicates the business of Carvana, which had to go into $3.3 billion in debt this year to fund the acquisition of auctioneer Adesa’s brick-and-mortar auction business.
Elimination of 1,500 additional jobs
The group is therefore under enormous financial pressure.
“Significant shorter-term operational and financial risks for Carvana have emerged and are likely to cloud CVNA’s investment narrative for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a note on Nov. 15, downgrading the stock.
He added that “we don’t envision investors bidding significantly higher on CVNA until prospects for a manageable and sustainable capital base become clearer.”
Nagel seems to confirm that Carvana has a liquidity problem that the group needs to address fairly quickly if it is to halt the collapse. According to FactSet, the company has between $6 billion and $7 billion in debt after deducting cash on the balance sheet.
But Carvana is not profitable: Adjusted EBITDA margin loss increased 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors gauge a company’s financial health.
The company is struggling to try to change things and delay raising equity or adding more debt as much as possible. For example, Carvana is determined to drastically reduce costs. After cutting 2,500 jobs in May, the company has just announced another wave of layoffs affecting 8% of its workforce or 1,500 employees.
“It’s fair to ask why this is happening again, and yet I’m not sure I can answer it as clearly as you deserve,” CEO Ernie Garcia said in an email on Nov. 18. at least a few factors. The first is that the economic environment continues to face strong headwinds and the near future is uncertain. This is especially true for fast-growing companies and those that sell expensive, often financed products where the purchasing decision can be made. easily slowed down like cars.”
In addition, “We haven’t been able to accurately predict how all of this would play out and what impact it would have on our business. As a result, we’re here.”
The new cuts will affect “many business and technology teams, as well as some operations teams where we are eliminating roles, locations or shifts to adapt our size to the current environment,” Garcia wrote.
Reached by TheStreet, Carvana declined to comment.
The new job cuts come after rating agency S&P Global Ratings warned it was likely to downgrade Carvana in the near term, changing its outlook from stable to negative.
“GPU [gross profit per unit] is expected to remain weak due to higher used car depreciation rates and lower revenues from sales of loans and other products,” the rating agency said. “Carvana generates more than 50% of its GPU from sales of loans and other products. With interest rates rising, it is harder for Carvana to compete with the big banks that can keep lending rates low, which will reduce the number of loans allocated to Carvana.”
Garcia ruled out the possibility of raising capital on Nov. 3.
“Our goals will be to reduce costs and get positive EBITDA as soon as possible,” he told analysts. “We’ve got a lot of committed liquidity. We’ve got a lot of real estate. And I think we feel like we’re in a good position to weather this storm because of that. And we’re making great strides within the company.”
But aside from these financial difficulties, Carvana also faces legal challenges. The company faces lawsuits from customers in multiple states over alleged issues with titles, registration, and vehicle purchases.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, and Carvana sued in return.
Carvana has said the lawsuits are baseless and called Michigan’s decision “arbitrary.”