The sky does not clear up for Carvana.
On the contrary, big clouds continue to hang over the company that was one of the big winners of the covid-19 pandemic, with massive growth.
Since announcing 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 versus $14.35 that day. This translates to a market cap decline 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 the favorable conditions to market its new way of buying a car. The group’s car vending machines weathered 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 through stimulus programs. Interest rates were close to zero, so financing the purchase of a vehicle cost practically nothing.
Added to this, automakers’ supply chains were disrupted, making it difficult to produce new vehicles. Faced with these challenges, consumers turned to the used market as wait times for new vehicles were long. Therefore, used car prices skyrocketed, 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 changed completely. The used car market is still hot. But all other factors have been 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 are rolling in. Used car prices remain high, but financing the transaction has become very expensive for consumers. Supply chains have improved significantly, facilitating the production of 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 $3.4bn, while net loss jumped to $283m from just $32m. in the third quarter of 2021, the company said. said in a letter to shareholders.
US used car sales fell nearly 13% year-over-year in the third quarter of 2022.
“If you’re looking at newer used cars, models in the 1- to 3-year-old range, you may find that prices are still relatively close to what they were selling for new,” Consumer Reports said. “If you have to borrow money to buy the car, it may be better to find a new car that can qualify you for a lower interest rate, not to mention the benefit of a new factory warranty. Many manufacturers subsidize financing and may offer rates interest rates that are much lower than normal for qualified buyers.
All of this complicates matters for Carvana, which had to borrow $3.3 billion to finance its acquisition of auction house Adesa’s physical auction business earlier this year.
Elimination of 1,500 Additional Jobs
Therefore, the group is under enormous financial pressure.
“Significant near-term operating and financial risks have emerged for Carvana and are likely to cloud CVNA’s investment story for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a Nov. 15 note, downgrading the shares. Actions.
It added that “we do not expect investors to offer significantly higher CVNAs until prospects for a manageable and sustained capital base become clearer.”
Nagel seems to confirm that Carvana has a liquidity problem that the group needs to address fairly quickly if it is to stop the collapse. The company has between $6 billion and $7 billion in debt net of cash on the balance sheet, according to FactSet.
But Carvana isn’t profitable: Its adjusted EBITDA margin loss rose 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors assess the financial health of a company.
The company is scrambling to try to turn things around and delay raising equity capital or adding more debt as long as possible. Carvana, for example, is determined to slash costs. After cutting 2,500 jobs in May, the company has just announced an additional wave of layoffs that affects 8% of its workforce, that is, 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 it deserves,” CEO Ernie Garcia told employees in a Nov. 18 email. “I think there are at least a couple of 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 companies that sell expensive products. , often financed, where the purchase decision can be easily delayed like cars”.
Furthermore, “we were unable to accurately predict how all of this would play out and the impact it would have on our business. As a result, we are here.”
The new cuts will affect “many corporate and technology teams, as well as some operations teams where we are cutting roles, locations or shifts to accommodate our size for 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 that it would likely downgrade Carvana in the near term, changing the outlook to negative from stable.
“GPUs [gross profit per unit] it is expected to remain weak due to higher used car depreciation rates and lower returns from the sale of loans and other products,” the ratings agency said. “Carvana generates more than 50% of its GPU from the sale of loans and other products. With rising interest rates, it is more difficult for Carvana to compete with the big banks that can keep lending rates low, which will reduce the number of loans allocated to Carvana.”
Garcia ruled out the option of raising capital on November 3.
“Our goals will be to reduce expenses and try to get positive EBITDA as quickly as we can,” he told analysts. “We have a lot of liquidity committed. We have a lot of real estate. And I think we feel like that puts us in a good position to weather this storm. And we’re making some big moves within the company.”
But in addition to these financial difficulties, Carvana also faces legal challenges. The company is facing lawsuits from customers in several states involving alleged problems with title and registration and vehicle purchases.
Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, and Carvana sued instead.
Carvana has said the lawsuits are without merit and called the decision in Michigan “arbitrary.”