The company was an investor darling during the pandemic. They hailed the new economy that wanted consumers to buy everything online: groceries, office equipment, travel tickets, meals, clothing, homes and cars.
Carvana (CVNA extension) – Get a free report pioneered the new way of buying and selling vehicles with its model of automotive vending machines.
The group has also benefited from disruptions in vehicle manufacturers’ supply chains, which have caused a major imbalance between supply and demand for cars to the detriment of supply. As a result, car prices had risen sharply, so that the prices of used vehicles were competitive with those of new vehicles. Interest rates were also close to zero, which had a double benefit for Carvana. It was easy to finance a vehicle purchase 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 tables have turned against Carvana, who is now facing a perfect storm. Interest rates have risen rapidly, making car financing more expensive. Supply chain problems remain, while 40-year high inflation threatens to push the economy into a recession, making consumers more cautious.
Stock continues to fall
As a result, rising interest rates should cause consumers to reevaluate their buying habits before quickly jumping into an auto loan, auto buying experts at Edmunds.com said.
“The last time interest rates were this high, consumers could at least rely on lower vehicle prices and a wider range of inventory to cushion the blow. That’s simply not the case in this market,” he said. Jessica Caldwell, executive director of Edmunds. of insights.
The average transaction price for a used vehicle fell to $30,045 in October 2022 from a peak of $31,095 in April 2022, but still represents a 4.7% year-over-year increase over October 2021, Edmunds says . The average annual effective rate (APR) for buying a used vehicle rose to 9.6% in October 2022 from 7.4% in October 2021, which is the highest since February 2010.
CEO Eric Garcia admitted last week that Carvana had misinterpreted market developments.
“We failed to accurately predict how all of this would play out and the impact it would have on our business. As a result, here we are,” Garcia told employees in an internal memo announcing $1,500 cuts. jobs, or 8% of the company’s workforce. This is the second wave of job cuts after 2,500 jobs were eliminated in May.
But investors don’t think the cost cuts will be enough to revive the group, which saw its net loss jump to $283 million in the third quarter from $32 million in the same period a year earlier. This is the message they send by liquidating the Carvava stake. The group’s stock price fell 13.71% to $6.95 on Nov. 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 $40 billion loss in market value.
“With the outlook deteriorating, cash burn will remain elevated and liquidity will deteriorate,” Wedbush analyst Seth Basham wrote in a note to clients. He believes Carvana is burning through cash too quickly due to losses in Adjusted EBITDA and high interest payments.
The company will therefore likely raise cash in the coming months, possibly through leasing or selling outright of its roughly $2 billion of owned real estate, to fund its business through 2023.
S&P Global Ratings has warned that a downgrade of Carvana is likely in the near term, changing the outlook from stable to negative.
“GPU [gross profit per unit] is expected to remain weak due to higher used-car depreciation rates and lower yields from selling loans and other products,” the rating agency said. “Carvana generates more than 50 percent of its GPU from selling loans and other products. With interest rates rising, it’s harder for Carvana to compete with the big banks who can keep lending rates low, which will reduce the number of loans Carvana makes.”
But Garcia ruled out the option to raise capital on Nov. 3.
“Our goals will be to reduce expenses and try to achieve positive EBITDA as quickly as possible,” he told analysts. “We have a lot of cash committed. We have a lot of real estate. And I think we think that puts us in a good position to weather this storm. And we’re making big moves within the company.”
EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors assess a company’s financial health.
The company reported $316 million in cash and cash equivalents as of September 30, down from $403 million as of December 31.
Carvana did not respond to TheStreet’s requests for comment.