- The company dedicated to the sale of used cars would be in a complex financial situation and experts speak of a possible bankruptcy.
- The board has not uttered the word “bankruptcy,” but many factors point to that being the case.
- The company would have ruled out a new round of collection and ensure that they have sufficient mattress support.
Despite a positive start to the year for the used car giant’s shares, its financial situation looks precarious. Carvana’s shares in the stock market started 2023 with a rise of 113%, but not everyone is convinced of the strength of that momentum. The company’s financial health does not show that this rally will continue over time.
At the start of the year, the shares went from $4.74 to $10.08 dollars per share. However, the company had done absolutely nothing to cause this flood to occur. In other words, the analysis suggested that it was an unjustified growth since the fundamentals had not changed. The firm also would not have made any announcement that sparked interest among investors.
Consequently, the impetus behind the stock rally was a “meme” surge. This term defines the coordinated measures of retail investors in social networks to invest capital in an action. This measure is intended to make short-seller funds lose money. The latter are dedicated to obtaining large profits by betting on the fall of the shares of the companies.
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Carvana’s situation: a look at its figures
But it is one thing to talk about a bad situation for Carvana and another to go inside and observe the magnitude of that bad moment. The used car salesman is in a fierce battle against the growing debts that she accumulates. To this is added that the firm closed 2022 with just $434 million dollars in cash on hand.
Thus, what seemed like a dream year 2023 is turning into a nightmare that leads the group to crash into reality. Momentum from retail investors could dilute at any time due to strong macroeconomic conditions. To this is added that the inheritance of 2022 reappeared more harshly. During the earnings call On February 23, the company highlighted that last year was a “very difficult” one.
The company’s board confirmed:
“From a short-term perspective, it was clearly a very difficult year. After eight straight years of year-on-year improvement, it was the first year we’d regressed on key metrics.”
Specifically, the firm’s numbers are terrible. During the third quarter, sales fell a painful -23%. At the same time, earnings fell back -24.4%. For each car it sold, the company lost about $7,400, and gross profit per unit fell $2,219. The latter equates to half down compared to gross profit for the same quarter last year.
In the same order, Carvana burned through $1.8 billion in cash to be left with just $432 million at the end of 2022. Regarding its debt, it grew to $7 billion dollars, which includes leases.
Other figures that show the bad situation of Carvana
What is described above is only a part of the bad results of the used car dealer. One of the most dramatic figures has to do with last year’s net losses. During 2022, the company posted a net drop equivalent to $1.59 billion. To have a clear image of this magnitude, it should be noted that the accumulated losses between 2014 and 2021 were $610 million..
In that six-year period, the company’s biggest annual drop was $171 million in 2020. It’s worth noting that that 2020 plunge was associated with the economic effects of the pandemic announcement.
But the pandemic also handed the company a good footing thanks to rising used-car prices. Problems with the supply chain and a shortage of chips caused a drop in the supply of new cars. That led people to turn to used cars as an alternative. In the middle of that moment of floods, the company chose to buy excess used cars in the hope of selling them at better prices.
However, conditions in the auto market normalized and the Federal Reserve announced rapid and aggressive rate hikes. Thus, the high cost of borrowing and the best deals from automakers made people return to the market for new cars. The result for Carvana is that it was left with warehouses full of vehicles.
There are no plans to undertake new collections
The circumstances listed above and other additional ones were listed during the call by the CEO of the company, Ernie García. Although the executive did not name the word “bankruptcy”, many experts believe that it is the elephant in the room, notes The Street.
The businessman stressed that the company is doing everything possible to reduce losses and costs. In this sense, one of the plans would consist of buying fewer cars to focus on the sales of those they own. This would seek to offset the slowdown in sales. In other words, the company bets on selling more cars than it buys.
At the same time, the company expects to cut annual costs by about $100 million dollars this 2023. Likewise, García ruled out the possibility of undertaking financing rounds, at least for the moment. On that subject, he said that Carvana “has many options.” One of the things that would give the company the most peace of mind is asset holdings in the real estate sector.
“I think we have access to capital in many forms. Obviously, we have a lot of very high-quality real estate. We have approximately $2 billion in real estate,” she expressed.
It should not be forgotten that the used car vending machine company has, in addition to the $432 million in cash, another $1.5 billion in committed facilities. Despite this, this support is not enough to dispel the doubts of analysts about the state of finances.
At the time of writing, the company’s shares on the stock market are trading at $9.57%. This is an increase of 7.22% at the close of the day on February 28.
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Is it advisable to invest?
Considering the landscape of the company’s conditions, investing in its shares is not a recommended option. All this depends on the risk tolerance of investors. In other words, Carvana’s actions could cause the total loss of capital.
Not to be overlooked is the fact that shares of this firm were over $50 in August of last year. Macroeconomic conditions are expected to worsen in 2023 and the US economy will end up in a recessionary situation.
Such circumstances would represent a tighter monetary policy by the central bank, which implies greater difficulties when it comes to borrowing. Not surprisingly, that’s not good for the used car business.
This work is for informational purposes only and cannot be assumed as advice or invitation to invest.