The sky is not clearing up for Carvana.
On the contrary, heavy clouds continue to gather over the company which has been one of the big winners of the covid-19 pandemic, with massive growth.
Since the announcement of its quarterly results on November 3, Carvana (CVNA) – Get a free report the shares have lost 44% of their value and are currently trading at $8.06 from $14.35 on the day. This translates to a decline in market capitalization of approximately $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 way of buying a car. The group’s car vending machines withstood the pandemic well, a period during which consumers wanted to avoid contact as much as possible, to limit their exposure to the virus.
The federal government had also flooded consumers with money via stimulus programs. Interest rates were close to zero, which meant that financing the purchase of a vehicle cost next to nothing.
Additionally, automakers’ supply chains have been disrupted, making it difficult to produce new vehicles. Faced with these challenges, consumers turned to the second-hand market as waiting times for new vehicles were long. Used car prices have therefore jumped, making it a good deal for Carvana.
Basically, all the winds were blowing in the right direction for the company.
New car or used car?
But coming out of the pandemic, Carvana’s fortunes seem to have completely turned around. The used car market remains hot. But all the other factors reversed. There is no more stimulus money. The central bank is aggressively raising interest rates and inflation is at its highest level in 40 years. The economy is also closer than ever to a recession, and waves of job cuts follow one another. Used car prices remain high, but financing the transaction has become very expensive for consumers. Supply chains have improved dramatically, making it easier to produce new vehicles.
This was felt in Carvana’s latest quarterly results: in the third quarter, Carvana’s revenue fell 2.7% year-on-year to $3.4 billion, while net loss jumped to $283 million. dollars compared to just $32 million in the third quarter of 2021, the company says in a letter to shareholders.
US used car sales fell almost 13% year-on-year in the third quarter of 2022.
“If you look at newer used cars — 1-3 year old models, you might find that the prices are still relatively close to what they sold for new,” Consumer Reports said. “If you need to borrow money to buy the car, it may be better to find a new car that may qualify you for a lower interest rate, not to mention the benefit of a new warranty. Many manufacturers subsidize financing and may offer interest rates well below normal for qualified buyers.
All of this complicates the affairs of Carvana, which had to take on $3.3 billion in debt to finance the acquisition of the physical auction business of auctioneer Adesa this year.
Elimination of 1,500 additional jobs
The group is therefore under enormous financial pressure.
“Significant, shorter-term operational and financial risks to Carvana have emerged and are likely to cloud CVNA’s investment story for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a 15 note. November, downgrading the action.
He added that “we do not envision investors making a significantly higher offer to CVNA until the prospects for a manageable and sustainable capital base become clearer.”
Nagel seems to confirm that Carvana has a liquidity problem that the group must resolve fairly quickly if it wants to stem the bankruptcy. According to FactSet, the company has between $6 billion and $7 billion in debt net of cash on the balance sheet.
But Carvana is not profitable: its adjusted EBITDA margin loss increased by 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors gauge a company’s financial health.
The company struggles to try to turn things around and delay raising equity or increasing debt as much as possible. Carvana, for example, is determined to significantly reduce costs. After cutting 2,500 jobs in May, the company has just announced a new wave of layoffs affecting 8% of its workforce, or 1,500 employees.
“It’s fair to ask why this is happening again, and yet I’m not sure I can answer it as clearly as you deserve,” chief executive Ernie Garcia told employees in a Nov. 18 email. “I think there are at least two factors. The first is that the economic environment continues to face strong headwinds and the near future is uncertain. This is especially true for fast-growing companies and for companies that sell expensive, often financed products, where the purchase decision can be easily delayed like cars.”
Additionally, “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.”
The new cuts will affect “many business and technology teams as well as some operations teams where we are eliminating roles, locations or changes to match our size with the current environment,” Garcia wrote.
Reached by TheStreet, Carvana had no comment.
The new job cuts come after ratings agency S&P Global Ratings warned it was likely to downgrade Carvana in the short 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 over 50% of its GPU by selling loans and other products. With rising interest rates, it is more difficult for Carvana to compete with larger banks that can keep lending rates low, which will reduce the number of loans allocated to Carvana.”
Garcia ruled out the option to raise 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.”
But apart from these financial difficulties, Carvana also faces legal challenges. The company is facing lawsuits from customers in multiple states over alleged issues with titles and vehicle registration and purchases.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, with Carvana suing in return.
Carvana said the lawsuits were without merit and called Michigan’s decision “arbitrary.”
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