No Rest for Carvana, the ‘Amazon of Used Cars’
Concerns are growing around Carvana, “the Amazon of used cars”.
The online auto retailer is an investor favorite during the pandemic. They praise the new economy that wants consumers to buy everything online: groceries, office supplies, travel tickets, meals, clothes, homes and cars.
carvana (CVNA) – Get a free report pioneer in the new car buying and selling method with the car vending machine model.
The group also benefits from supply chain disruptions by automakers, which have caused a huge imbalance between auto supply and demand with supply costs. Thanks to that, the price of cars increased sharply, the price of old cars competed with the price of new cars. Interest rates are also close to zero, which is doubly beneficial for Carvana. It’s easy to finance the purchase of a car for consumers, and Carvana can also enter the debt market to finance its expansion. As a result, the company went into debt five times during the pandemic.
But the situation turned against Carvana, now facing a perfect storm. Interest rates have risen rapidly, making car financing more expensive. Supply chain problems persist, while 40-year high inflationary threatens to push the economy in Depressionmake consumers more cautious.
Stocks continue to fall
As a result, rising interest rates will prompt consumers to re-evaluate their shopping habits before quickly taking out a car loan, say auto buying experts at Edmunds.com.
“Last time when interest rates were this high, consumers could at least rely on lower car prices and more inventory to cushion the impact,” said Jessica Caldwell, chief executive officer of Edmunds. It simply doesn’t happen in this market.” of deep insights.
The average transaction price for a used car fell to $30,045 in October 2022 from a peak of $31,095 in April 2022, but still represents a 4.7% increase year-over-year compared to October 2021, Edmunds said. The average annual percentage rate (APR) for a used car purchase rose to 9.6% in October 2022 from 7.4% in October 2021, which is a high the most since February 2010.
CEO Eric Garcia last week admitted that Carvana had misunderstood market movements.
Garcia told employees in an internal memo in which he announced 1,500 job cuts, or 8.0% of the company’s workforce. This is the second wave of job cuts following the 2,500 job cuts in May.
But investors don’t think the cost-cutting will be enough to revive the group, which saw a net loss rise to $283 million in the third quarter from $32 million in the same period a year earlier. . This is the message they are sending by liquidating Carvava stock. The group’s share price fell 13.71% to $6.95 on Nov. 21, which resulted in a $200 million drop in market value between the two trading sessions.
Since the beginning of the year, shares of Carvana have lost 97% of their value, which equates to a loss of $40 billion in market value.
Cash increase?
“With the outlook deteriorating, cash burn will remain high and Liquidity going bad,” Wedbush analyst Seth Basham wrote in a note to clients, believing that Carvana burned through cash too quickly due to adjusted EBITDA losses as well as high interest payments.
The company is then likely to raise cash in the coming months, possibly through a sale-leaseback or outright sale of about $2 billion of its property, to finance its business. its business until 2023.
S&P Global Ratings has warned that it is likely to downgrade Carvana’s rating in the near term, changing the outlook from stable to negative.
“GPU [gross profit per unit] The ratings agency said: “Carvana generates more than 50% of GPUs from the sale of loans and other products. With interest rates rising, it will be harder for Carvana to compete with the big banks that can keep interest rates on hold. borrowing is low, which will reduce the number of loans allocated to Carvana.”
But Garcia ruled out the option to raise funds on November 3.
“Our goal is to keep costs down and try to get to a positive EBITDA as quickly as possible,” he told analysts. “We have a wide range of committed liquidity. We have a range of real estate. And I think we feel that puts us in a good position to weather this storm. And We are making great strides in the Corporate market.”
EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors assess a company’s financial position.
The company reported $316 million in cash and cash equivalents as of September 30, down from $403 million on December 31.
Carvana did not respond to a request for comment from TheStreet.