Carvana stock has had a nice run so far in 2023 — soaring 892%.
With plunging revenue, a negative net worth, and a debt restructuring deal with considerable weaknesses, this Tempe, Arizona-based online used car dealer’s stock ended July down 88% from its July 2021 all-time high.
That is not stopping the meme crowd from squeezing the short sellers — 47.1% of the used car vendor’s shares are sold short, according to the Wall Street Journal. Is it too late to buy Carvana stock? Analysts see the stock as over-valued.
Carvana’s Second Quarter Financial Condition
In the second quarter, Carvana reported better than expected results — though mixed when compared to the year before. According to CNBC, here are the key numbers:
- Revenue down 24% to $2.97 billion — exceeding the Refinitiv estimate by $380 million
- Net loss down 76% to ($105 million) compared to the year before’s ($439 million)
- Gross profit per unit up 94% to $6,520 compared to the year before
- Adjusted earnings before interest, taxes, depreciation and interest: $155 million — an improvement over Carvana’s negative EBITDA of $216 million the year before
Carvana was pleased with the results. Carvana CEO Ernie Garcia said in a statement, “Our strong execution has made the business fundamentally better, and combined with today’s agreement with noteholders that reduces our cash interest expense and total debt outstanding, gives us great confidence that we are on the right path to complete our three-step plan and return to growth.”
How Carvana Got Into A Pickle
Unfortunately, Carvana’s liabilities ended the second quarter at $9.25 billion — $1.4 billion more than its assets, according to the Wall Street Journal.
In early December 2022, Carvana’s stock lost 33% of its value when Wedbush cited a risk of bankruptcy. Bloomberg reported creditors who controlled about 70% of Carvana’s unsecured debt had agreed to act together in negotiations. This deal prompted Wedbush to set a $1 price target for Carvana — then trading at $4 a share — citing rising bankruptcy risks at Carvana.
How did Carvana get in so much trouble? As CNBC reported, demand for Carvana’s used car service was robust during the early days of the Covid-19 pandemic as consumers opted for online purchasing rather than in-person visits to dealerships.
Carvana was unable to keep up with the surge in demand and lacked sufficient people to process the vehicles it had in stock. In response, Carvana paid $2.2 billion to acquire ADESA’s physical auction business and a record number of vehicles at very high prices, noted CNBC.
Last November Carvana faced numerous problems — some of which remain and others on which the company is making progress. These two problems remain:
- Declining industry demand. Demand was softening for Carvana and CarMax
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- Gloomy forecast. Carvana was not optimistic about 2023. Garcia described 2023 as “a difficult one.” As he told investors in November 2022, “Cars are an expensive, discretionary, often-financed purchase that inflated much more than other goods in the economy over the last couple years and it is clearly having an impact on people’s purchasing decisions.”
These have improved:
- Weaker cash position. Between June and September 2022, Carvana’s cash balance declined by $734 million — leaving Carvana with a mere $316 million in cash. By June 30, 2023, the company’s cash had increased to $1 billion.
- Lower profits from selling loans. Before 2022, Carvana’s gains from selling loans along with other ancillary fees accounted for more than half of Carvana’s gross profit per unit. But gross profit per unit from selling loans and other fees dropped 23% from $2,500 to $1,921 in the third quarter of 2022, noted Financial Times. This figure has since increased over three-fold.
Carvana’s July Debt Restructuring Deal
Carvana spent about a year working on a deal to restructure its debt. On July 19, it announced the terms — which reduced its debt by $1.2 billion. Carvana stock rose 40% thereafter, the Journal reported.
The deal will eliminate “over 83% of its 2025 and 2027 unsecured note maturities and lower its required cash interest expense by more than $430 million per year for the next two years,” noted the Journal. Shareholders will be diluted by a separate deal to sell as many as $1 billion worth of its common shares.
Carvana was happy with this deal. Carvana CFO
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The deal covers roughly $5.2 billion of senior, unsecured bonds and includes Apollo Global Management, its largest bondholder. The deal gives creditors new secured notes which will come due later than the old notes.
The new notes have very high interest rates — yet Carvana will not pay the $430 million worth of interest in cash for two years. Instead, the interest will increase the principal amount of the loan, according to the New York Times
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Apollo Global Management is comfortable with the terms. John Zito, deputy chief investment officer of credit at Apollo, said in a statement, “Apollo is pleased to support this debt exchange agreement, which stands to significantly strengthen Carvana’s financial position while providing creditors with new first lien debt.”
Carvana’s Popularity With The Meme Crowd
Carvana’s stock has risen so much thanks, in part, to a short squeeze. Short sellers borrow stock, sell it in the open market, and hope to repay the shares they borrowed at a lower price after the stock falls.
When shares of such a stock go up, the lenders of shares often demand the short sellers immediately repay their loans. This forces the short sellers to buy shares — driving them up even further.
According to Finbold, Carvana’s rally reflects such a short squeeze — sparked by traders who share their views on Reddit. In July, Carvana was the seventh most-trending stock on Reddit.
Where Carvana Stock Is Going
Wall Street analysts expect Carvana stock to fall.
Jefferies’ Carvana Pessimism
Jefferies is pessimistic about Carvana — lowering its rating from underperform to hold. According to MarketWatch, analyst John Colantuoni wrote in a weekend note to clients, Carvana’s strong increase in GPU reflects transitory tailwinds such as “wider wholesale/retail spreads and the timing of loan sales” that will not continue.
He expects unit growth to resume in 2024, putting downward pressure on GPU. Further, he expects “an acceleration in unit growth [in 2024] leading to inefficiencies that further negatively impact per unit economics.”
Colantuoni cut his price target to $30 from $55 in his latest report, while warning concerns about the “viability” of Carvana’s business model could return, noted MarketWatch.
Morgan Stanley Questions Carvana’s Business Model
Morgan Stanley analyst Adam Jonas sees significant challenges facing Carvana management. According to TipRanks, Jonas praised Carvana for cutting costs and restructuring its debt.
He also sees significant challenges for used car consumers and “the viability of CVNA’s long term business model.” Jonas wrote Carvana’s current stock price already factors in “a transition back to growth.” He questions whether Carvana can grow while maintaining the high GPU the company reported in the second quarter.
TipRanks reports analysts who have set a 12-month price target see Carvana stock falling about 14% to $37.69 in the months ahead.
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