Why investors have jumped off the Carvana bandwagon

Ernie Garcia, CEO, Carvana

Scott Mill | CNBC

DETROIT – Last year, Caravan CEO and co-founder Ernie Garcia is on a victory lap.

He said the company’s “landmark” second quarter results on August 5, 2021 included the used car retailer’s first-ever quarterly net profit. He then recalled the rapid growth of “a bunch of ambitious kids with an alarming amount to learn” into Fortune 500 companies.

Now it appears the company’s executives still need to learn more. Carvana’s fairytale rise has become a nightmare for investors amid rising interest rates, inflation and self-inflicted wounds.

Since Garcia’s comments last year, the company’s stock has fallen from an all-time high of nearly $377 per share, notched in August last year after a standout quarter, to a low. $6.50 per share this week – 98% decrease. Carvana has dropped from a $60 billion market cap to $2.2 billion after a small rally to end the week.

stock won more than 30% on Thursdayfollowed by a 19% increase to $11.88 per share Friday amid a broad market rally and a possible short-seller squeeze.

But it’s bad news and financial results since the stock’s peak, are stirring. concern among investors about the company’s long-term trajectory. It also has little cash and $6.3 billion in debt, including $5.7 billion in senior notes.

Carvana CEO Ernie Garcia in the company's first profitable quarter

Carvana has consistently borrowed money to cover losses and growth initiatives, including an all-cash acquisition of $2.2 billion earlier this year the physical auction business of AS ADESA from KAR Global.

“We believe CVNA is far from out of the woods, as even though the industry is down, we don’t see a V-shaped recovery,” JPMorgan analyst Rajat Gupta wrote in a Tuesday note to investors. The company cut projections for earnings and free cash flow for the company.

Morgan Stanley last week pulled rating and target price for stocks. Analyst Adam Jonas cited the deterioration in the used car market and the volatile cost environment for the change.

Management error


Then there is Carvana’s debt.

Corporate bonds hit all-time highs this week, as they burn through cash and face rising borrowing costs.

The Wall Street Journal reported Wednesday that the company’s long-term bonds have declined to distressed levels, with some now trading as low as 33 cents on the dollar. The yield on its 10.25% note was more than 30% on Tuesday, according to MarketAxess, a sign that Carvana will struggle to borrow from the current bond market.

Morgan Stanley cited the company’s debt and uncertain funding outlook in pulling the rating and target price for the stock. Jonas said “a deterioration in the used car market combined with a volatile interest rate/cost environment” created a “material risk” for the company.

Jonas issued a new base case range for Carvana between $1 per share and $40 per share over the next 12 months.

Price pressure

The used car market is on pace to finish the year down more than 12% from 40.6 million vehicles sold in 2021, according to mid-October estimates from Cox Automotive. Carvana’s sales through the third quarter of this year were up 4% in 2021, but that was far more profitable than a year earlier and lower on a quarter-on-quarter basis.

Carvana’s third-quarter sales fell 8% from a year earlier, while profit per vehicle sold fell 25% to $3,500. CEO Garcia described the end of the third quarter as “the most unexpected point ever” for customers financing the purchase of a vehicle.

“Carvana succeeded in disrupting the car industry with a proven e-commerce model serving millions of satisfied customers, and although the current environment and market have attracted attention in the near term, we continued to gain market share in Q3, and we remain focused on our plans. to drive profitability, while making the best car buying and selling experience available even better,” said a company spokesman in a statement.

used car prices decreased by 2.4% since last month

The decline has come amid falling wholesale prices of new vehicles. The Manheim Used Vehicle Value Index, which tracks the price of vehicles sold at US wholesale auctions, has fallen by 15.4% this year through October after peaking in January, including a 2.2% drop from September to October.

Retail prices traditionally follow changes in wholesale. That’s good news for potential car buyers, but not so good for companies like Carvana that bought vehicles at record highs and are now trying to sell them for a profit.

Used vehicle prices have so far remained steady, but that won’t last long, as wholesale costs continue to drop.

“They don’t want to sell at trough prices,” said Chris Frey, senior industry insight manager at Cox Automotive. “That’s why we’re not seeing prices drop that much at retail.”


Frey said vehicle affordability continues to decline, with auto loan rates reaching a 15-year high even as prices have fallen slightly. The average used listing price for a used vehicle stabilized but remained near a record high of more than $28,200, according to Cox Automotive.

“We’ve seen the effect of the slowdown in retail sales, and a lot of it has to do with affordability,” Frey said. “The aspect of affordability, married with a high price is beginning to have an effect on the cost of sales.”

The competition is also heading to Carvana. During the coronavirus pandemic, franchised vehicle dealers such as AutoNation forced to start selling vehicles online while showrooms are closed and consumers are moving away from dealerships. Traditional rival Carvana is starting to deliver on the same promise to buy cars online for free.

“They’ve taken a lot, almost all, of the air out of the balloon for Carvana,” Frey said.

—CNBC’s Michael Bloom contributed to this report.

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