CVNA - Carvana: Sell On Rallies Amid Persistent Technical Weakness

2023-10-31 11:45:43 ET

Summary

• Carvana demonstrates financial solid performance with a significant increase in gross profit per unit in Q2 2023.
• The strategic shift towards profitability leads to declining sales volume and total revenue.
• Technical analysis indicates a consistent bearish trend in Carvana's stock price with no signs of reversal.
• The company is scheduled to announce Q3 2023 earnings on November 2, 2023, which could impact its stock price.

Carvana Co. ( CVNA ) demonstrated an impressive financial performance in Q2 2023, marked notably by a significant increase in its gross profit per unit ((GPU)). This rise in GPU not only shattered the company's previous records but also highlighted its effective cost management and pricing strategies. Interestingly, the focus on enhanced profitability led to a noticeable decline in sales volume and total revenue, underlining the company’s strategic shift towards profitability rather than volume growth. The company is scheduled to release its earnings for Q3 2023 on November 2, 2023. Following this announcement, the stock price is anticipated to experience significant volatility. This article offers an in-depth examination and technical assessment of Carvana's stock price to discern its upcoming trajectory and potential investment avenues. The analysis indicates that the stock price consistently follows a robust bearish trend, with no signs of reversal from its low point.

Carvana's Financial Performance

In Q2 2023 , the total GPU rose to $6,520, a 94% increase from Q2 2022. This figure not only surpassed the company's previous best quarter by 27% but also highlighted the firm's effective cost management and pricing strategies. Similarly, the total Non-GAAP GPU, an alternative measure excluding certain items, climbed to $7,030 – up by 91% compared to Q2 2022 and exceeding the company’s previous record quarter by an impressive 36%. It’s important to note that these GPU figures included around $900 per unit from non-recurring items, which significantly influenced these metrics.

The company's focus on profitability was further evidenced by its net loss margin, which improved notably. The net loss margin was reported at (3.5%), a significant improvement of 7.8% from Q2 2022 and a sequential enhancement of 7.5% from Q1 2023. Adjusted EBITDA margin, a key indicator of operational efficiency and profitability, stood at 5.2%. This figure not only improved by 10.8% compared to Q2 2022 but also exceeded the company's best-ever quarter by 1.6%. Both net loss and Adjusted EBITDA figures were favorably impacted by around $70 million due to non-recurring items.

Despite these strong profitability indicators, Carvana's sales volume showed a different trend. The number of retail units sold and total revenue witnessed substantial declines, falling 35% and 24%, respectively, compared to Q2 2022. These declines to 76,530 units sold and revenue of $2.968 billion were primarily attributed to the company's strategic focus on profitability over sales volume. This strategic shift is part of a broader internal initiative prioritizing profitability, which has resulted in more than $1.1 billion in annualized cost reductions over the past 12 months. The chart below presents the quarterly revenue for Carvana.

Carvana's CEO, Ernie Garcia, expressed optimism and confidence in the company's trajectory. He underscored the exceptional performance in key financial metrics and emphasized the combined effect of strong execution and strategic decisions like the agreement with noteholders. This agreement, which aims to reduce cash interest expenses and total debt outstanding, is a crucial step in completing Carvana’s three-step plan and returning the company to growth. Ernie Garcia’s comments reflect a strategic pivot focusing on making the business fundamentally stronger while setting the stage for future expansion.

The firm is set to reveal Q3 2023 earnings on November 2, 2023, an event anticipated to influence its stock value. Projected revenues are at $2.79 billion, a modest dip from the $2.97 billion reported in Q2 2023. Additionally, the expected EPS normalized is ($0.78), with the EPS GAAP forecasted at ($0.65).

A Deep Dive into Historical Price Patterns

The technical analysis of Carvana, as depicted in the monthly chart below, indicates a bearish trend. The chart reveals that Carvana's stock price, though currently at a low point, continues to appear weak. This decline in value is particularly marked by the sharp drop during the last quarter of 2021 and the first quarter of 2022, bringing the stock's value down to levels last seen in 2017. Notably, while the stock has experienced a significant fall recently, it's important to highlight a dramatic surge in its price following the onset of the COVID-19 pandemic in 2020.

This dramatic surge was primarily due to the shifting consumer behaviors amidst the COVID-19 pandemic and the company's innovative business model. The pandemic accelerated the adoption of online shopping, and Carvana, a leading online used car retailer, stood at the forefront of this trend. The company's user-friendly platform, offering a wide range of vehicles and the convenience of online purchase and home delivery, resonated with customers looking to avoid in-person transactions. Additionally, the used car market saw a surge in demand partly due to new car production disruptions caused by global supply chain issues. This demand spike led to higher prices and profitability in the used car sector, favorably impacting Carvana's revenues and stock price.

However, Carvana's stock peaked in 2021 and then experienced a sharp decline due to a confluence of factors. One significant issue was the normalization of the market as pandemic-related restrictions eased and traditional car dealerships reopened, increasing competition. Additionally, Carvana faced operational challenges, including scaling issues and rising costs, which started to impact its bottom line. The supply chain constraints and semiconductor chip shortage that initially boosted used car prices began to resolve, leading to a stabilization and eventual decrease in used car prices, affecting Carvana's revenue growth and profit margins. Investor sentiment also shifted as the market began focusing more on profitability and sustainable business models rather than just growth metrics, which impacted the stock adversely. This change in market conditions, along with broader economic concerns like inflation and potential recessions, led to a reassessment of Carvana's long-term profitability and growth prospects, contributing to the sharp drop in its stock price.

Currently, the stock price is stabilizing at lower levels but encountered robust resistance around $60, leading to a subsequent decline. The monthly chart shows an inside bar at this resistance point, suggesting a potential build-up for a significant move as the price consolidates at this level. However, this inside bar broke downward, resulting in further price decreases. The appearance of a bearish hammer candle at the record high of $376.82, followed by a sharp price fall, signals a strong bearish trend. A reversal in price from this point is likely to require an extended period to stabilize before any upward trend resumes. The negative monthly candles for September and October 2023, following the inside bar in August 2023, suggest the possibility of the stock price maintaining a downward trajectory in the short term.

Decoding Key Levels for Investors

The bearish trend in the monthly chart becomes more apparent when examining the weekly chart. This chart shows significant price volatility throughout the first half 2021, leading to a broadening wedge pattern. This pattern originated at a target price of $158.25. However, the price not only broke through this wedge but also fell below the $158.25 mark, entering a steep decline and eventually plummeting to around $6. Subsequently, the price attempted to form a rounding bottom, with a crucial neckline near $60.

Nevertheless, the price faltered upon reaching this neckline. Currently, this neckline is viewed as a critical resistance level for any potential upward movement. The likelihood of the price dropping further remains high if it stays below $60. This bearish perspective is reinforced by the RSI now breaking below the median level 50.

Delving deeper into this negative sentiment, a closer look at the daily chart reveals a double top formation with peaks at $57.19 and $56.80. This pattern was confirmed with a break below $41, establishing this level as the short-term resistance. With the RSI approaching oversold territory, there might be an interim price rebound towards $41 before it potentially declines again.

Given that earnings results are due to be announced, and with expectations of ongoing price volatility, any rally towards $41 post-earnings could present a selling opportunity for traders and investors. On the other hand, a surge above $60 would invalidate this bearish view, potentially leading to further upward movements.

Market Risk

Carvana, as the most prominent online used auto retailer, exhibits significant sensitivity to economic cycles and changing market dynamics. The company's impressive increases in GPU and cost management strategies have bolstered profitability amidst a challenging environment. However, the used car market, inherently volatile, is affected by broader economic downturns, shifts in consumer preferences, and supply chain disruptions.

Financially, Carvana's recent performance shows strengths and vulnerabilities. The reliance on high GPU for profitability, alongside falling sales volume and revenue, underscores a risk if market conditions turn unfavorably. While the net loss margin indicates an improvement, the fact that the company is still operating at a loss cannot be overlooked. The recent initiative to reduce cash interest expenses and debt through an agreement with noteholders is a step in the right direction. However, the company's overall debt levels and the risks associated with future refinancing in an unstable credit market remain pertinent concerns. Additionally, the significant influence of non-recurring items on recent profitability metrics can pose risks to sustainable performance and future growth projections.

The stock has experienced significant bearish pressure, yet it has developed a rounding bottom pattern, identifying $60 as a critical neckline. Financial performance enhancement, coupled with a technical breakout above this $60 level, could pave the way for additional upward movement, effectively completing the rounding bottom formation.

Bottom Line

In conclusion, Carvana’s performance in Q2 2023 paints a picture of a company at a critical juncture. Financially, it has demonstrated notable success in increasing its GPU and improving its profitability metrics. This shift towards profitability, however, has come at the cost of a decline in sales volume and total revenue, suggesting a strategic reorientation from growth-focused to profit-focused operations. CEO Ernie Garcia’s confidence in the company's strategic decisions and the effective execution of its business plan underlines a positive outlook from the management’s perspective.

Conversely, the company’s stock performance reflects investor skepticism and broader market concerns. The bearish trends indicated by technical analysis and the challenges posed by changing market dynamics, operational scaling, and competitive pressures present significant challenges. The stock’s current weak position and the resistance levels it faces highlight the market’s lack of confidence in its short-term growth potential despite its recent financial achievements. The inability of the price to surpass $60, coupled with a bearish monthly candle in October, suggests ongoing market selling pressure. With the upcoming announcement of the company's Q3 2023 earnings on November 2, 2023, any rise toward $41 could present a selling opportunity for investors. Nonetheless, a breakthrough above $60 would counter the current bearish outlook, potentially paving the way for further gains.

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