2023-03-20 13:37:27 ET
Summary
- Carvana Co. has seen continued losses and the business sees continued top line sale pressure.
- The company expects some improvements in the first quarter, but the hole is big and recent events in the banking sector likely cast a shadow on the operating performance.
- The situation remains very dire, speculative at best, as serious investors have no reasons to be involved here with Carvana Co.
In October of last year, I called shares of Carvana Co. (CVNA) a car wreck as the company entered a period of serious turmoil with a lot of debt, with apparently no easy ways out.
The company has seen a staggering boom-bust cycle, as this was a $360 stock at its peak in 2021, with shares down more than 95% in the time span of just a year.
Some Perspective
When Carvana went public in 2017, I believed the offering was a disaster as the company was posting stiff losses, and investors at the time were not really willing to finance these. On the other hand, the potential of the disruptive business model was appealing as well, driven by transparent pricing, 360 degrees imaging technology and delivery (either pick-up from the high-profile vending machines, or delivered at home).
Wider selection, uniform evaluation of quality and a reduction in the hassle of buying a car was the promise behind the company, and actually drove growth for a while. The company grew rapidly, as the company posted sales of $365 million in 2016, a small number in relation to a used vehicle market which totaled $700 billion around the time, generated from about 40 million transactions.
The company went public at $15 in 2017, as shares fell to $11 per share on the opening day of trading, still working down to a $2 billion valuation. This was applied to a business which grew sales 180% to $365 million, yet gross profits only came in at $19 million, with operating losses being steep at $93 million. With a more than $200 million cash position, the burn rate was worrying, as it was clear that losses were expected for a while, as the market quickly forgot about these concerns.
Fast forwarding to the pandemic year, the company has grown 2020 sales by as much as 42% to $5.6 billion, as gross profits rose to $794 million, having increased to 14% of sales. The company still posted an operating loss of $462 million, and while these were up compared to the IPO, relative progress was made.
The pandemic accelerated momentum in 2021 in a huge way, with sales up 130% to $12.8 billion, as gross profits rose to $1.9 billion while operating losses narrowed to $286 million. Despite these spectacular sales results, which fueled the shares to a high above $300 and pushed up the market value to $50 billion in the late summer of 2021, there were some writings on the wall. The company had just half a billion equity cushion on a $7 billion asset base, leaving the business quite challenged. More so, inspired confidence by a higher share price meant that the company wanted to move into physical auctions as well, announcing a multi-billion deal for ADESAs physical auction unit.
The company saw shares down to $100 by spring 2022 and just $30 early summer in 2022, as investors were fearful about the impact of interest rate hikes on the business. First quarter sales rose 56% to $3.5 billion, but margins were down a bit and the company saw a huge $506 million loss amidst lower gross margins and higher costs, all while the company closed the ADESA deal in May.
Second quarter sales growth slowed to 16% as revenues totaled $3.88 billion, with gross margins stabilizing around 10%, yet a $438 million operating loss was huge, certainly as the company squeezed out an operating profit in the same quarter a year before.
With 186 million shares trading at $15 in October, the $2.8 billion valuation still is quite large as the company burns through about $2 billion a year, while there is no shareholder equity, debt was getting expensive, and used care prices were down. Given the situation, the best outcome investors should hope for was a FED pivot of strategy or white knight, but the reality is that liquidity and bankruptcy concerns would be the most likely scenario in my book.
Muddling Through
Since October, Carvana Co. shares have kept falling to a low of $3 and change early this year, and the exception of a small momentum run to $15 in February, shares are now down to $7 again.
In November, the company posted third quarter results with revenues down 3% to $3.39 billion. Note of course that this includes the contribution of ADESA, indicating that sales trends otherwise would have been much worse. Operating losses rose to $508 million, but in all fairness, it should be said that interest expenses are already factored into this number in Carvana's definition. These interest expenses totaled $153 million for the quarter, a substantial amount and rising sharply amidst higher loan rates and borrowing base.
Fourth quarter revenues fell to $2.84 billion as a $1.44 billion operating loss was reported following a $847 million goodwill impairment charge, with operating losses otherwise coming in around $600 million. This comes amidst elevated interest expenses and more gross margins pressure, as costs savings cannot offset these headwinds. Net debt has risen to $8 billion and with interest expenses increasing rapidly, there is no quick way out, certainly not as the first quarter of 2023 provides just a few reasons to become upbeat.
On the other hand, Carvana Co. indicated that it sold 5,600 retail units for the first seven weeks, as March is traditionally a strong month amidst the tax refund loss. This means that a sequential increase in units and likely revenues for this key division might be expected in the first quarter.
This should hopefully bring some operating leverage, as Carvana Co. sees a $100 million reduction in selling, general and administrative expenses as soon as the second quarter of 2023 (compared to the final quarter of 2022). Such an achievement will likely be eaten by higher interest expenses, and the fact that March might not play out as expected, given the turmoil in financing markets, which is key for Carvana as well, of course.
Amidst all these trends, there are few reasons to be upbeat on Carvana Co. here, let alone be a shareholder in the business.
For further details see:
Carvana: No Easy Options