Summary
- Carvana Q4 revenues miss as vehicle sales tumble.
- Cash burn continues at an alarming rate.
- Near term, the situation doesn't seem to be significantly improving.
After the bell on Thursday, we received fourth quarter results from online vehicle retailer Carvana ( CVNA ), seen in this investor letter . Once one of the biggest growth stories in the market, the company is now being forced to dramatically cut its vehicle sales as its financial situation worsens. While management continues to talk about ongoing progress and brighter days ahead, the reported numbers continue to paint a very ugly picture.
After a number of years of massive vehicle sales growth and thus revenues, Carvana hit a wall in 2022. The massive Adesa acquisition added a lot of debt and more expenses, but management eventually realized it couldn't continue on its then current path. As a result, the company has had to draw down inventory levels quite substantially, and when combined with a tougher macroeconomic picture, retail units sold saw a huge hit in Q4 as seen below.
In total, Carvana reported Q4 2022 revenues of about $2.84 billion. Not only was this down more than 24% from the year ago period, but the number missed street estimates by $210 million. This miss looks much worse when you consider that in the last 12 months, the average street revenue estimate came down by $1.4 billion, which was a more than 30% decline. Even when Carvana was showing massive unit sales and revenue growth and basically beating top line street estimates every quarter, the company was losing a bunch of money.
With revenues now being crimped substantially, management has worked to cut expenses but progress has not been fast enough. Even when taking out a massive goodwill impairment charge in Q4, net losses were nearly $600 million, more than triple the loss from a year earlier. In the quarter, interest expenses alone were nearly 80% of the company's reported GAAP gross profit, and that doesn't even take into account operating expenses.
With Carvana focusing on massive growth in past years, even if it did squeak out some profits in a quarter here or there it still was usually burning cash thanks to large capital expenditures. In Q4, almost $800 million was burned despite a large drawdown of inventory, primarily because finance receivables held for sale soared. As a result, the balance sheet is in its worse shape ever, with the net debt position closing in on $8 billion as seen below. Total liquidity resources dropped by $468 million sequentially to $3.92 billion, with half of this amount being unpledged real estate.
Looking forward, management has guided to lower retail unit sales in Q1 as compared to Q4. The current forecast calls for the company to see an increase in gross profits per unit, while further operating expense improvement is expected. However, given what's expected to be another sequential decline in the top line, it seems like the only question here is how much will the company lose? With interest rates on the rise, Carvana is looking at more interest expenses as well, which hurts even more at these lower revenue levels.
Carvana closed Thursday with a market cap a little under $2 billion. If the company needs to tap the equity market to raise further capital, that is going to be a highly dilutive offering. Going into Thursday's Q4 report, analysts were calling for a couple of percent of upside in shares, but the after-hours gain puts us right near that average price target . It seems that analysts believe management can get the financial situation under control and get back to eventual growth. These are the same analysts that had price targets well over $200 for a while even when shares started to crash. Of course, the stock has had to nearly triple to recover to current prices just over $10, as investors were quickly believing late last year that bankruptcy was an option.
In the end, Carvana reported another ugly quarter on Thursday, which is only increasing the financial pressure that the name is under. Q4 revenues badly missed dramatically reduced street estimates, while another massive loss was reported. Management can talk all it wants about potential improvement coming up, but the balance sheet just continues to get worse. I would not want to be long this name right now, but it's also hard to recommend shorting because of the massive volatility we've seen recently thanks to already sky short interest. Thus, investors should probably wait on the sidelines for another quarter to see if things are starting to turn a corner or not.
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Carvana Remains In Deep Trouble