CVNA - Carvana: Navigating Long-Term Sustainability After PIK Deferral Ends

2024-06-24 16:29:41 ET

Summary

• New car inventories are 55% higher compared to last year, leading automakers and dealers to offer discounts and incentives to sell their building up inventories.
• Used car prices could drop by as much as 24% due to inventories building up and soft demand.
• Carvana’s earnings have benefitted from an unrealized gain on its Root warrants as well as PIK payments.
• Carvana plans to pay cash interest on its secured debt next year along with a $98 million unsecured debt maturity.
• My price target for Carvana is $18.2, representing 84% downside from its current valuation.

Last March, I initiated my coverage on Carvana Co. ( CVNA ), rating it as a strong sell due to weakness in the auto loan market, fueled by high delinquency rates and its unsustainable earnings, in my opinion. Although the stock has climbed by nearly 31% since then, I remain bearish on Carvana due to the headwinds facing used car prices, which could see used car prices fall by as much as 24%.

In addition, I still believe the company’s financial performance is unsustainable, due to the company sharing that it plans to commence cash interest payments on its restructured debt in 2025. With the last PIK interest payment on the 2028 and 2030 notes scheduled for next August, I expect the market to re-rate Carvana, as its mountain of debt will once again become the forefront of the stock’s investment thesis, due to the high interest payments that the company will have to pay in cash....

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