2023-03-20 14:35:46 ET
Summary
- Carvana Co. remains a battleground stock.
- On the one hand, we have analysts steadily downwards revising Carvana Co.'s prospects, after analysts were clearly wrong in 2022.
- While for their part, Carvana's management continues to put their money where their mouth is and buys up stock in the open market.
- And then, to further complicate matters, Carvana's balance sheet faces a problem, its 2025 notes.
Investment Thesis
Carvana Co. ( CVNA ) continues to see its share price sliding lower. Recall, this is what I previously voiced about Carvana.
Author's work: Analysts Got This Wrong
Simply put, this is my contention: I was ahead of the curve at a time when analysts were still bullish on Carvana Co. But today, analysts have nearly unanimously moved to the other side of the boat. Today, the consensus view is to be bearish on CVNA.
And yet, with the stock very close to an all-time low, I no longer believe it makes sense to be as bearish on CVNA.
My argument is thus, if CVNA can survive the next twelve months , then it will most likely succeed in avoiding bankruptcy.
The Consensus View
Every time that an investor thought Carvana Co. was cheap, the stock would suddenly move to become even cheaper. In fact, I believe that unless an investor was extremely nimble in buying at the absolute low prices in December into January, most investors would today be holding a loss on their CVNA investment.
What this means is that there's a near-consensus view that this stock is on the edge of bankruptcy. There's no shading in this view. But let's delve into some nuance.
12 Months Can be a Very Long Time
The graphic above is a reminder of how long twelve months can be for any company. Twelve months ago, when CVNA reported its Q4 2021 results, it had just exited the quarter with triple-digit growth rates.
This time last year, very few investors would have had it in their investment framework that there was a possibility that a year later the stock would be down more than 90%.
But as I articulated in the introduction, it wasn't just investors that got CVNA wrong. Analysts following CVNA were also caught on the back foot.
As you can see above, since the summer, analysts have been downwards revising their outlook for CVNA. Analysts were not thinking ahead. Rather than being proactive with their models, they were reactive to the share price.
So what's next?
12 Months From Now Could be Very Different
Right now, everything looks extremely grim. And I'm not going to state that the time to buy stocks is when there's blood on the street or when companies are on the edge of bankruptcy. That's an extremely high-risk investment strategy.
That investment ''strategy'' sounds fun and daring. But that's not how real returns are made. Real returns are not made from being risky. But by buying into companies when there's a misalignment between consensus expectations and potential prospects.
To put it concretely, I declare that for CVNA the next twelve months are crucial. If, and it's a big if , CVNA can survive the next twelve months, its prospects could rapidly improve.
Biggest Impediment to Upside Potential
Note below that there are two arrows.
The top arrow shows that within 2 years CVNA will need to deal with its $500 million 2025 notes. But if you've been on this path before, you know that analysts and creditors are not going to wait 2 years to ask difficult questions, such as what's the strategy to deal with this debt stack.
Creditors want to know that this free cash flow burning company has a realistic and timely strategy to tackle this upcoming maturity.
Meanwhile, the second arrow shows the interest rates on CVNA's recently raised debt. Back in May 2022, at a time when interest rates were substantially lower than right now, CVNA raised capital on terms akin to ''distressed equity,'' meaning higher than a 10% coupon on its debt.
Consequently, given all the banking crisis afoot at present, plus interest rates being higher than in 2022, also the economy being particularly weak, do we think that CVNA could refinance on better or worse terms than in May 2022?
Indeed, recall that at the start of May 2022, when CVNA raised capital , its share price was about 6x higher than it is right now. So creditors at the time would have probably thought that the financial terms were fair. What's more, there's a clause that allowed for early redemption in 2027 at par.
With everything that we've discussed, I wonder whether if that same deal was struck today, those creditors would have so eagerly signed up?
The Bottom Line
The task facing Carvana Co. is very straightforward. The business is struggling to reach positive free cash flow. And then, to further compound matters, I believe that the debt market is now closed to CVNA.
Therefore, my question is this, are Tiger Global, Morgan Stanley, and others, right that Carvana Co. will avoid bankruptcy?
And Carvana's C-suit right to continue buying up shares?
Or are analysts right now? After they were clearly so wrong earlier in 2022? With a $1 billion market cap, whichever way the next twelve months go, Carvana Co. will be one for the history books.
For further details see:
Carvana: Next Chapter