Struggling Carvana, the ‘Amazon of Used Cars,’ Has Investors Worried

Concerns are growing regarding Carvana, also known as the “Amazon of used cars.”
During the pandemic, investors adored the company.They praised the new economy, which encouraged consumers to shop online for everything:groceries, office supplies, tickets for trips, meals, clothes, homes, and automobiles.
With its model of car vending machines, Carvana (CVNA) – Get Free Report was a pioneer in the new method of buying and selling vehicles.
The group also benefited from disruptions in the supply chains of automobile manufacturers, which had contributed to a significant supply-demand imbalance.Because of this, car prices had skyrocketed, putting used cars and trucks in direct competition with new ones.Carvana had a double advantage because interest rates were close to zero.Customers could easily finance the purchase of a vehicle, and Carvana could also use the debt market to finance its growth.As a result, the business defaulted five times during the pandemic.
However, Carvana is currently facing a perfect storm as the situation has turned against it.The rapid rise in interest rates has increased the cost of car financing.Problems with the supply chain persist, and consumers are becoming more wary as 40-year high inflation threatens to plunge the economy into recession.
Stock Continues To fall
Thus, increasing financing costs ought to cause purchasers to reconsider their shopping propensities before rapidly hopping into a vehicle credit, said vehicle shopping specialists at Edmunds.com.
“When interest rates were as high as they are now, consumers could at least count on lower prices for automobiles and a wider selection of inventory to cushion the blow.That simply isn’t the case in this market,” Edmunds’ executive director of insights, Jessica Caldwell, stated.
According to Edmunds, the average transaction price for a used car fell to $30,045 in October 2022 from $31,095 in April 2022. However, this still represents a 4.7% increase year-over-year when compared to October 2021.In October 2022, the average annual percentage rate (APR) for purchasing a used vehicle increased to 9.6%, up from 7.4% in October 2021, the highest rate since February 2010.
Last week, CEO Eric Garcia acknowledged that Carvana had misinterpreted market developments.
We were unable to accurately anticipate the course of events and the consequences for our company.As a result, we are where we are,” Garcia stated to employees in an internal memo announcing job cuts totaling 1,500, or 8% of the workforce, at the company.Investors do not believe that the cost reductions will be sufficient to revive the company, which saw its net loss increase to $283 million in the third quarter from $32 million in the same period a year earlier. This is the second wave of job cuts after 2,500 jobs were eliminated in May.By selling the Carvava share, they are sending this message.On November 21, the price of the group’s shares dropped 13.71 percent to $6.95.Between two trading sessions, this led to a $200 million decrease in the market value.
The market value of Carvana shares has decreased by $40 billion since the beginning of the year, or 97%.
Getting Money?
Wedbush analyst Seth Basham wrote to clients, “With a deteriorating outlook, cash burn will remain high and liquidity will deteriorate.”Due to high interest payments and adjusted EBITDA losses, he believes that Carvana burns cash too quickly.
To fund its operations through 2023, the company will likely raise funds in the coming months through sale-leasebacks or direct sales of its approximately $2 billion worth of owned real estate.
Carvana’s outlook has been downgraded from stable to negative by S&P Global Ratings, which has stated that it is likely to downgrade the company in the near future.
The rating agency stated, “GPU [gross profit per unit] is expected to remain weak due to higher rates of used car depreciation and lower returns from selling loans and other products.”More than half of Carvana’s GPU comes from selling loans and other products.Carvana will have a harder time competing with the big banks that can keep loan rates low as interest rates rise, which will reduce the number of loans it receives.”
On November 3, however, Garcia ruled out the possibility of raising capital.
He stated to analysts, “Our objectives are going to be on driving down expenses and attempting to get positive EBITDA as quickly as we can.”We’ve committed a lot of liquidity.We have a lot of real estate.Additionally, I believe that puts us in a favorable position to weather this storm.What’s more, we’re taking extraordinary actions inside the organization.”
EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, enables investors to assess a company’s financial health.
As of September 30, the business had $316 million in cash and cash equivalents, down from $403 million as of December 31.
TheStreet contacted Carvana for comment, but the company did not respond.

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