Carvana Shares Plunge on Quarterly Loss, Analyst Warnings

(Bloomberg) — The walls are closing in on online used-car dealer Carvana Co., whose disappointing quarterly results sent the stock into freefall Friday and triggered a string of warnings from analysts, with JPMorgan dealing the harshest blow.

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This one-time hedge fund darling’s high debt level suggests there is no equity value left in the stock, JPMorgan analyst Rajat Gupta wrote in a note to clients, adding that he estimates the company’s “cash liquidity” to last through the end of this year. If Carvana taps into about half of its real estate capacity, that would bring it funds for another year, Gupta said.

Shares of the company sank as much as 21% to $7.93 on Friday, the biggest drop since Dec. 7, after the troubled auto retailer reported a much wider loss than what analysts had estimated. The stock has been on a wild rally this year, rising more than 110% through Thursday amid a surge in the speculative corners of the market. Despite Friday’s selloff the stock is still up 77% in 2023, rebounding from a disastrous 98% drop last year.

Though the challenges of the used-car market — where prices have started to fall fast after rising to dizzying levels during the pandemic years — remain tough to navigate, Carvana’s main trouble remains its huge debt load.

“The elephant in the room is the $600 million of run-rate interest burden with management suggesting they are willing to add even more if needed for liquidity bandwidth in the near to medium-term,” JPMorgan’s Gupta added.

The company, which has a market valuation of about $1.5 billion, has total debt of about $8.1 billion and cash of about $316 million, according to data compiled by Bloomberg. Meanwhile, the industry is expected to remain tough, which means demand will continue to be rocky, as consumers stay cautious amid concerns about a recession, high interest rates and a sticky inflation.

The fourth quarter “did not offer slam-dunk evidence disproving the bankruptcy thesis, but management still sounds convinced that additional capital may be unnecessary,” Piper Sandler analyst Alexander Potter said, though noted that Carvana showed some hints of progress, including reducing operating expenses.

(Updates the extent of the drop in share price in headline and third paragraph.)