The rout of Carvana, “the Amazon of used cars”, has no end

Concern is mounting around Carvana, “the Amazon of used cars”.

The company was a cherished investor during the pandemic. They hailed the new economy that wanted consumers to buy everything online: groceries, office supplies, travel tickets, meals, clothes, homes and cars.

carvana (CVNA) – Get a free report pioneered the new way of buying and selling vehicles with its model of car vending machines.

The group also benefited from disruptions in car manufacturers’ supply chains, which had caused a strong imbalance between supply and demand for cars at the expense of supply. As a result, car prices had jumped sharply, so used car prices were competitive with new car prices. Interest rates were also close to zero, which had a double advantage for Carvana. It was easy to finance the purchase of a vehicle for consumers and Carvana could also tap into the debt market to finance its expansion. The company thus went into debt five times during the pandemic.

But the situation turned against Carvana, who now faces a perfect storm. Interest rates have risen rapidly, making car financing more expensive. Supply chain issues persist, as a 40-year high inflation threatens to rock the economy recessionmaking consumers more cautious.

The stock continues to fall

As a result, rising interest rates should cause consumers to re-evaluate their buying habits before jumping into a car loan quickly, said car-buying experts at Edmunds.com.

“The last time interest rates were this high, consumers could at least count on lower vehicle prices and a wider range of inventory to cushion the blow. That’s just not the case on this market,” said Jessica Caldwell, executive director of Edmunds. of insight.

The average transaction price for a used vehicle fell to $30,045 in October 2022 from a high of $31,095 in April 2022, but still represents a 4.7% year-over-year increase. different from October 2021, according to Edmunds. The average annual percentage rate (APR) for the purchase of a used vehicle rose to 9.6% in October 2022 from 7.4% in October 2021, the highest since February 2010.

CEO Eric Garcia admitted last week that Carvana had misinterpreted market developments.

“We failed to accurately predict how this would all play out and the impact it would have on our business. As a result, we end up here,” Garcia told employees in an internal memo announcing the loss of 1,500 jobs, or 8% of the company’s workforce. This is the second wave of job cuts after the loss of 2,500 jobs in May.

But investors don’t think the cost cuts will be enough to revive the group, which saw its net loss widen 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 the Carvava share. The group’s share price fell 13.71% to $6.95 on November 21. This resulted in a $200 million drop in market value between two trading sessions.

Since the start of the year, Carvana shares have lost 97% of their value, representing a loss in market value of $40 billion.

Raise money?

“With a deteriorating outlook, cash burn will remain elevated and liquidity will deteriorate,” Wedbush analyst Seth Basham wrote in a note to clients. He thinks Carvana is burning through cash too quickly due to adjusted EBITDA losses as well as high interest payments.

The company will then likely raise funds in the coming months, likely through sale-leasebacks or outright sales of its roughly $2 billion in real estate, to fund operations through 2023.

S&P Global Ratings warned it was likely to downgrade Carvana in the near term, changing the outlook from stable to negative.

“GPUs [gross profit per unit] is expected to remain weak due to higher used car depreciation rates and lower yields from the sale of loans and other products,” the rating agency said. “Carvana generates more than 50% of its GPU by selling loans and other products. With rising interest rates, it is more difficult for Carvana to compete with large banks that can keep lending rates low, which will reduce the number of loans granted to Carvana. »

But Garcia ruled out the option of raising capital on Nov. 3.

“Our goals will be to reduce expenses and try to get positive EBITDA as quickly as possible,” he told analysts. “We have a bunch of cash committed. We have a bunch of real estate. And I think we think that puts us in a good position to weather this storm. And we’re making great strides inside the company.”

EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors gauge a company’s financial health.

The company reported $316 million in cash and cash equivalents as of September 30, compared to $403 million as of December 31.

Carvana did not respond to TheStreet’s requests for comment.

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