The sky is not clear for Carvana.
On the contrary, big clouds continue to hang over the company that was once one of the big winners in the covid-19 pandemic, with outstanding growth.
Since announcing quarterly results on November 3, Carvana (CVNA) – Get a free report the stock has lost 44% of its value and is currently trading at $8.06 from $14.35 that day. This resulted in a market capitalization drop of around $1.1 billion in two weeks. Carvana currently has a market value of $1.43 billion.
The company, founded in 2012 and based in Arizona, took advantage of favorable conditions to market its new car buying method. The group’s car vending machines have stuck well with the pandemic, a period in which consumers want to avoid exposure as much as possible, to limit exposure to the virus.
The federal government has also pumped money into consumers through stimulus programs. Interest rates are close to zero, which means financing the purchase of a car practically costs nothing.
In addition, the supply chains of automakers are disrupted, making it difficult to produce new vehicles. Faced with these challenges, consumers have turned to the used car market because of the long wait times for new cars. As a result, used car prices skyrocketed, making it a bargain for Carvana.
Basically, every wind is blowing in the right direction for the company.
New Car Or Used Car?
But stepping out of the pandemic, Carvana’s fortunes seem to have completely reversed. The used car market is still hot. But all other factors were reversed. No more stimulus money. The central bank is aggressively raising interest rates and inflationary is at a 40-year high. The economy is also close Depression than ever before, and waves of job cuts follow. Used car prices remain high, but financing the transaction has become very expensive for consumers. The supply chain has been significantly improved, facilitating the production of new vehicles.
This was felt in the latest quarterly results from Carvana: In the third quarter, Carvana’s turnover fell 2.7% year-on-year to $3.4 billion, while net loss increased to $283 million from just $32 million in the third quarter of 2021, the company said in a letter. to shareholders.
Used car sales in the US fell nearly 13% year-over-year in the third quarter of 2022.
“If you’re looking at newer used cars – models between 1 and 3 years old, you can see that prices are still relatively close to what they’re selling for new cars,” he said. Consumer Reports says. “If you have to borrow money to buy a car, you’re better off finding a new car that can help you qualify for a lower interest rate, not to mention the benefit of a factory warranty. Many manufacturers subsidize and may offer much lower interest rates than usual to qualified buyers.”
All of this complicates the work of Carvana, which took on $3.3 billion in debt to finance its acquisition of Adesa auction house’s physical auction business this year.
carvana
Eliminate 1,500 additional jobs
As a result, the group was under enormous financial pressure.
“Significant short-term operational and financial risks to Carvana have emerged and are likely to cloud the investment narrative of Carvana,” Oppenheimer analyst Brian Nagel said in a note on Nov. CVNA in the near future”.
He added that “we don’t envision investors bidding on CVNAs meaningfully higher until the prospect of a manageable and sustainable capital base becomes clearer.”
Nagel seems to confirm that Carvana has a Liquidity problems that the team must solve fairly quickly if it is to prevent a collapse. The company has $6 billion to $7 billion in debt after deducting the above cash Accounting balance sheetaccording to FactSet.
But Carvana wasn’t profitable: its adjusted EBITDA marginal loss increased 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors assess a company’s financial position.
The company is struggling to try to change things up and delay as much as possible raising equity or raising more debt. For example, Carvana is determined to drastically reduce costs. After cutting 2,500 jobs in May, the company just announced another wave of layoffs affecting 8% of its workforce, or 1,500 employees.
CEO Ernie Garcia told employees in an email on November 18: “It’s fair to ask why this is happening, but I’m not sure I can answer as clearly as you deserve. “. at least a few factors. The first is that the economic environment continues to face strong headwinds and an uncertain near future. This is especially true for fast-growing companies and for businesses that sell expensive, often funded products where a purchase decision can be as easily delayed as an automobile. “
Additionally, “we haven’t been able to predict exactly how all of this will play out and the impact it will have on our business. As a result, we find ourselves here.” “
“The new cuts will affect “many company and technology groups as well as some operations teams where we are eliminating roles, locations or shifts to match their size,” Garcia wrote. me with my current environment”.
Reached by TheStreet, Carvana did not comment.
Legal issue
The new job cuts come after ratings agency S&P Global Ratings warned it was likely to downgrade Carvana’s rating in the near term, changing its 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.”
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.”
But in addition to financial difficulties, Carvana also faces legal challenges. The company is facing lawsuits from customers in multiple states related to alleged problems with vehicle ownership, registration and purchase.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, and Carvana countersued.
Carvana has said the lawsuits are unfounded and called the decision in Michigan “arbitrary”.
