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Key Takeaways
- Yahoo Finance announced that Carvana had earned the dishonor of being the worst company of the year due to its financial difficulties.
- The largest creditors of Carvana have signed a pact to work together in the event of a possible debt restructuring, which would indicate that there are concerns the used car retailer could be on the brink of filing for bankruptcy.
- Many critics think that Carvana didn’t prepare for an economic downturn, with people concerned about the amount of money spent on a Super Bowl ad, the purchase of Adesa, a hiring spree, and a lack of planning for inventory shifts.
Carvana Co. (CVNA) became the leading e-commerce platform for buying and selling used vehicles online over the last few years. Now, it looks like the company is on the verge of dire financial straits.
The auto retailer has had one of the most legendary falls of this year. Its collapse is surprising when you consider how used car sales took off in 2021 due to lower interest rates and an increase in disposable income.
When the company announced lower-than-expected third-quarter earnings in November, its stock plummeted the next day. Unfortunately, share prices have only continued to fall since then. We’re going to look at the forecast for Carvana in 2023.
What happened to Carvana?
Before we examine the recent issues with Carvana, we must paint the picture to see what led to the meteoric rise of the used car dealer.
Carvana Offered an unique business model
Carvana struck at the right time with a combination of commerce and clear, towering vending machines to steer away from the traditional dealership model.
The platform also allowed customers to shop for used vehicles online with haggle-free pricing and home delivery. Some locations even offered “vending machines” that took up multi-levels, enabling car buyers to choose what they wanted.
This model was also fortunate to endure the timing of pandemic-related restrictions. There was a situation where people were at home more and had more disposable income. Plus, the government even pumped the economy with money.
These factors combined made folks eager to buy vehicles from the comfort of their homes.
Used car sales surged during the pandemic
Due to a semiconductor shortage that cut the supply of new cars, used car prices shot up in 2021. Many buyers switched to used vehicles since they couldn’t get their hands on new ones.
This led to used car inflation setting a record high of 41% annually in January 2022, which was positive for a company like Carvana because it meant that they generated more revenue.
The overall consumer inflation peaked at 9.1% in June, and it became evident that the Fed would get aggressive about rate hikes to slow the economy down. Higher interest rates mean that fewer people can afford to invest in a new set of wheels.
On top of this, people are cautious about spending as there are fears of a pending recession.
The current state at Carvana
As 2022 comes to a close, there are fears that Carvana might have to file for bankruptcy. Carvana stock has dropped about 98% in value since the start of the year. The stock has a 52-week high of $241.99 and a low of $3.55.
The fears of possible bankruptcy began after a report from Bloomberg that stated some of the largest holders of Carvana’s debt had signed an agreement commiting to work together while negotiating a possible debt restructuring.
These creditors have agreed to work together to have more leverage in negotiations since debt holders are primarily concerned with getting their money back.
The firms working together hold $4 billion of Carvana’s $6.3 billion in debt. It was also reported that Carvana is having discussions with lawyers and investment bankers regarding options for managing the debt load as rumors of its solvency issues continue to lower the stock price.
Debt restructuring doesn’t always indicate that a company is on the brink of bankruptcy, and Carvana could still find a way to meet its obligations. However, the fact that the creditors signed a pact doesn’t look promising for the future of Carvana.
Ultimately, there aren’t any analysts who are confident about the company’s financial situation.
What’s hurting Carvana?
While many companies are hurting financially right now due to the macroeconomic factors that have been impacting numerous industries, some issues are relatively unique to Carvana.
Used car prices have dropped
The prices of used vehicles have declined in the past six months. The Manheim Used Vehicle Value Index, which monitors prices of used cars sold at U.S. wholesale auctions, saw a drop of 15.6% in November from the record levels in January.
New vehicles are finally more available compared to historic lows. Due to the semiconductor chip shortage, production issues with new cars led to extremely low inventories and higher prices.
Buying new cars also provides consumers with more options, and dealerships could offer better financing options.
According to Cox Automotive, it’s estimated that used retail sales fell 1% in November from the month before and are down 10% year-over-year. It’s also estimated the total used market was likely to finish the year down 12% from the 40.6 million figure in 2021.
The biggest issue with this is that since Carvana sells used cars, the entire business model relies on them buying cars for less than they sell them for to turn a profit. The other issue is that with used car prices dropping, the company is holding inventory that’s depreciating daily.
Earnings report was weaker than expected
Carvana announced its earnings report on November 3, and the weaker results led to the stock plummeting. It reported revenue of $3.386 billion, down 2.7% annually. This was $300 million less than analysts expected.
The company had a loss of $2.67 per share compared to a loss of $0.38 a year ago. Retail units sold were down 8.4% to 102,570.
Investors were also disappointed with the balance, and the company’s long-term plans are in question. Since Carvana has minimal cash and $6.3 billion in debt, including $5.7 billion in senior notes, there are concerns about the retailer’s ability to cover debt payments.
This is all highly worrisome since Carvana’s cash and equivalents totaled $1.05 billion in its second quarter this year. It now has just $316 million left.
Carvana hasn’t been able to turn an annual profit, but that is normal for high-growth companies like this.
It’s also worth mentioning that Carvana’s official earnings report released last month didn’t share a quantitative forecast for 2023 because they felt the current economic situation made it impossible to do so. These are clear warning signs that the company isn’t doing well.
How should you be investing?
Many pandemic success stories are suffering as consumer spending habits shift due to soaring inflation and higher interest rates, making everything feel more expensive. Due to these factors, the stock market has been highly volatile.
It is alwys challenging to invest in a market as volatile as what we’re seeing right now. With a variety of artificial intelligence (AI) investment strategies, Q.ai helps investors build long-term wealth without the stress of tracking individual stocks. Portfolio Protection is also available to protect your gains and reduce losses, no matter what industries you invest in.
Bottom Line
When we wrote about Carvana a month ago, there were fears that it could become a $1 stock. Now, there are fears that the company could go bankrupt.
Even though Carvana thrived during the lockdown months when we had stimulus money circulating and folks were embracing online shopping options, they didn’t take the precautions to prepare for rate hikes and an economic slowdown.
The forecast for Carvana in 2023 doesn’t look promising since the used car retailer has yet to prove that it can navigate this challenging economic downturn. As the sell-offs continue with every rate hike announcement, it will be a while before Carvana can regain investor confidence.
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Source: https://www.forbes.com/sites/qai/2022/12/25/carvana-stock-dropped-almost-100-in-2022whats-the-forecast-for-2023/