Concerns are growing about Caravana, the “Amazon of used cars”.
The online car retailer has been a darling of investors during the pandemic. He praised the new economy that wanted consumers to buy everything online: groceries, office supplies, travel tickets, food, clothing, homes and cars.
caravan (cvna) – GET FREE REPORT pioneered a new way of buying and selling vehicles with its model of car vending machines.
The group also benefited from disruptions in automakers’ supply chains, which had created a huge imbalance between the supply and demand of cars at the expense of supply. As a result, car prices skyrocketed, allowing the prices of older vehicles to compete with newer vehicles. Interest rates were also near zero, giving Carvana a double edge. It was easy for consumers to finance the purchase of a vehicle and Caravana was also able to tap into the debt market to finance its expansion. For example, the company went into debt five times during the pandemic.
But the tide has turned against Caravana, which is now facing a perfect storm. Interest rates have risen sharply, making car financing more expensive. Supply chain issues remain, while 40 years of high inflation threatens to push the economy into recession, making consumers more cautious.
the stock continues to fall
As a result, rising interest rates should lead consumers to reevaluate their buying habits before taking out a car loan, according to the car shopping experts at Edmunds.com.
Jessica Caldwell, executive director of Edmunds, said: “The last time interest rates were this high, consumers could at least count on lower car prices and a wider range to cushion the blow. That’s not the case in this market. of insight.
The average transaction price for a used vehicle dropped to $30,045 in October 2022, compared to a peak of $31,095 in April 2022, but still represents a 4.7% year-over-year increase compared to October 2021, Edmonds says. The average annual percentage rate (APR) of purchasing a used vehicle increased to 9.6% in October 2022, compared to 7.4% in October 2021, the highest since February 2010.
CEO Eric Garcia admitted last week that Carvana had misjudged market developments.
Garcia told employees in an internal memo, “We haven’t been able to accurately predict how all of this would play out and what effect it would have on our business. As a result, we’re here. % of the company’s employees. This is the second wave of job losses after 2,500 jobs were lost in May.
But investors don’t think the cost-cutting will be enough to revitalize the group, which led to a net loss of $283 million in the third quarter, compared to $32 million in the same period a year earlier. This is the message they are giving by doing away with the Karwava share. The group’s share price fell 13.71% to $6.95 on November 21. This resulted in a $200 million drop in market value between the two trading sessions.
Since the start of the year, Carvana shares have lost 97% of their value, representing a $40 billion loss in market capitalization.
“With a deteriorating outlook, cash burn will remain high and liquidity will deteriorate,” Wedbush analyst Seth Basham wrote in a note to clients. They believe that Carvana is spending money too quickly because of adjusted EBITDA losses and higher interest payments.
The company will then raise cash in the coming months through sale-leaseback or outright sales of owned properties of approximately $2 billion to fund its operations through 2023.
S&P Global Ratings has warned it is likely to downgrade Carvana in the near term, changing its outlook from stable to negative.
“GPU [gross profit per unit] “Used car depreciation rates are expected to remain low due to lower proceeds from sales of loans and other products,” the rating agency said. Carvana generates more than 50% of its GPUs through the sale of loans and other products. With interest rates rising, it will be harder for Carvana to compete with larger banks that can keep lending rates lower, which will reduce the number of loans allocated to Carvana.”
But Garcia rejected the option to raise capital on Nov. 3.
“Our goal is to try to reduce costs and get to positive EBITDA as quickly as possible,” he told analysts. “We have a lot of committed liquidity. We’ve captured a lot of real estate. And I think we feel like it puts us in a good position to weather this storm. And we have made great strides in Have been.” company.”
EBITDA refers to earnings before interest, taxes, depreciation, and amortization, which helps investors gauge a company’s financial health.
The company reported cash and cash equivalents of $316 million as of September 30, down from $403 million as of December 31.
Carvana did not respond to requests for comment from TheStreet.