2023-03-22 09:00:00 ET
Summary
- Carvana is experiencing a massive slowdown in revenue growth while expenses continue to increase, which is causing major losses on the books.
- Carvana has never generated $1 in annual cash from operations, has never turned a profit, and has never generated FCF.
- Carvana has negative equity and negative book value on the balance sheet and without profitability, it will be unable to repay its debt and fix its leverage ratio.
- I have no position short or long in Carvana and unless Carvana can fix its profitability issue, I don't see a happy ending for the company.
The Carvana ( CVNA ) chart still seems crazy when I look at it. This is a company where its stock appreciated by 1,160.10% from trading at $29.35 on 3/19/20, then climbing $340.75 per share to $370.10 on 8/10/21. The downfall was even more dramatic as shares fell -98.96% from 8/10/21 to 12/7/22 when shares reached $3.55. Over the past 3 ½ months, shares of CVNA climbed 307.04% to $14.55 from its lows of $3.55 and have settled at $7.65, which is a 115% increase from the bottom. The shorts have been having a field day as short interest is currently 61.75%, and CVNA is one of the most heavily shorted stocks in the market. Now the questions - will the company ultimately file for chapter 11, or can CVNA turn the corner and force a major short squeeze? CVNA does a tremendous amount of business, as its revenues were $13.6 billion in 2022, but this is a company that has never had a profitable year. I don't have a horse in the race as I have never held a long or short position in CVNA. Their financials are a mess, and unless the consumers speak with their wallets, CVNA could be in even more trouble than they are now.
Carvana's financials are a disaster and there is no indication it will ever be profitable
Cash flow is the lifeblood of a company. Companies survive on the spread between cash in and cash out. If you're not taking in more cash than spending, it's only a matter of time before the last lever is pulled to keep the lights on. CVNA has a real business here as they have grown into a $13.6 billion revenue company, the problem is that it can't even turn a profit.
CVNA experienced tremendous growth, as revenue increased 101.48% YoY in 2019, 41.80% YoY in 2020, and by 129.35% YoY in 2021 to $12.81 billion. Its gross profit also grew at a rapid rate as it increased by 153.61% YoY in 2019, 57.06% YoY in 2020, and by 141.45% in 2021. Then in 2022, growth came in at 6.17% YoY for CVNA's revenue, and 2022 was also the first year where CVNA lost over $1 billion.
Every business needs to spend money to make money, but when spending outpaces revenue, it doesn't matter how much revenue growth there is as the losses expand. This is what occurred with CVNA, the expenses continued to increase, and the losses expanded. To generate the increased revenue YoY, CVNA spent more on their cost of revenue and their selling, general, and Administrative expenses. Until 2022 CVNA had limited losses as in 2021, CVNA generated -$287 million in earnings from operations and -$135 million in net income. With the spread on profitability being limited, fueling growth for future profits made sense in its business model, then 2022 happened.
Keep in mind that going into 2022, CVNA was unprofitable. Revenue growth in 2022 came in at 6.17% as it grew by $790 million. While the mid-single-digit growth isn't appealing, CNVA still added $790 million to its top line. The problem was that to generate the additional $790 million in revenue, CVNA spent an additional $2.18 billion between the cost of revenue and operating expenses to achieve this. The cost of revenue grew 13.55% ($1.47 billion) YoY, and selling, general and administrative expenses increased by 34.45% ($702 million) YoY. After all of the expenses were accounted for, CVNA's earnings from operations came in at -$2.89 billion, and their net income was -$1.58 billion. CVNA wasn't a profitable business, to begin with, and in 2022, despite its growth, CVNA continued spending at all costs to try and win a race between revenue and expenses which backfired.
Due to GAAP Accounting principles and write-offs, I prefer looking at free cash flow ((FCF)) as my preferred measure of profitability. Unlike net income, FCF can't be manipulated through write-offs, write-downs, and other GAAP accounting practices. FCF is simply deducting capital expenditures from the cash generated from operating activities. How much cash a company generates from its operations is much harder to manipulate than net income because $1 of cash from ops should always equal $1 of cash from ops.
A huge red flag for me is that CVNA has never generated a positive dollar of cash from operations. While 2022 was better than 2021, they still generated -$1.32 billion in cash from operations. After the -$512 million spent on CapEx, CVNA had negative FCF of -$1.84 billion in 2022. This makes me want to stay away from CVNA because they are generating over $13 billion in revenue, and not only are they not GAAP profitable, they aren't generating FCF, which means they will have difficulty meeting their future liability requirements.
Carvana's balance sheet continues to deteriorate
Well, I wasn't thrilled with CVNA's income and cash flow statement, and I am even less thrilled with its balance sheet. There are red flags across the entire balance sheet from negative shareholder equity to negative book and tangible book value.
CVNA has $8.7 billion in total assets, of which $755 million are short-term investments and cash. CVNA has $1.88 billion in inventory, which can be liquidated for close to fair value if needed, but $4.34 billion of assets is tied to gross property, plant, and equipment. Normally I don't have a problem with a large portion of a company's assets being tied to gross property, plant, and equipment, but CVNA's properties only fit their needs. Look at the picture below, CVNA basically built a vertical vending machine for vehicles. If CVNA needs to sell off properties, who can use these? This isn't warehouse space that can be used by anyone, and it's not a typical car dealership that could be acquired and integrated into its ecosystem. This is specifically built for their operations, and if their operations fail, it will be hard to get their money out of these properties at liquidation. For this reason, I don't see their properties and plant assets representing what they spent to build them, and that's a problem.
CVNA has $9.75 billion in total liabilities, of which is $1.53 billion in short-term borrowings and $6.32 billion in long-term debt. Without profits, these debt obligations can't be met without an equity raise which dilutes shareholders, issuing more debt, or refinancing. With interest rates rising, this is a horrible time to add additional debt or refinance. The stock is weak, so an equity raise that will dilute existing shareholders is also difficult.
The bottom line on CVNA's balance sheet is that the company isn't even worth a single dollar in a fire sale. Due to the level of debt, and liabilities, even if the assets are worth what is on the balance sheet, CVNA has -$1.05 billion in shareholder equity on the books. Without generating profits to clear out a portion of the liabilities, CVNA will continue to have negative value as its liabilities will be larger than its assets. On a per-share basis, CVNA has a book value of -$4.89 and a tangible book value of -$5.55. The total debt of the company is more than the total asset value, and for CVNA to right-size these numbers, they need profits that are non-existent.
Conclusion
The shorts are in control, and I feel that there is a better chance that they stay in control than a short squeeze occurring. CVNA has too many things working against it, especially the non-existent FCF. I am asking myself if I would invest in a company with negative book value and equity, lost -$1.59 billion in the last fiscal year, and never generated a single dollar in cash from operations, not even FCF? Based on everything I am seeing, I wouldn't because there isn't a path to profitability and eliminating enough debt to have positive equity on the books. If 2022's revenue was still growing at its previous rates, I might feel differently, but there is a good chance revenue could go backward in 2023. This isn't something I would put my capital into because the financials don't work for me. I don't have a crystal ball, and while CVNA could prove me wrong and a massive short squeeze could occur, I think there is just too much for them to overcome to get me interested.
For further details see:
Carvana: Up 115% Since December But Short Interest Of 61.75% Is In Control