The ubiquitous e-commerce platform for buying and selling used cars, Carvana
Why is this important? Stock price is used to calculate a public company's market capitalization, or value. Declining stock price directly translates into a declining valuation. Carvana's valuation a little over a year ago (Q3'21) was ~$25.80 billion. It has now dropped to a mere $532.92 million as of 12/16.
Low interest rates, stimulus checks, and low gas prices fueled the Company's growth during the pandemic. As the economy heads for a downturn and the Fed focuses on taming inflation, we are faced with high interest rates (which make car loans expensive), higher gas prices, and lower discretionary income. Consumers purchase less vehicles as a result or extend the use of their current vehicles.
The Company's inventory (part of its current assets) declined YoY to Q3'22 while its current and long-term liabilities (debt) grew. The Company's top line, or total revenue, declined 2.7% from ~$3.5 billion to $3.4 billion from Q3'21 to Q3'22. Carvana has four main sources of revenue, with retail vehicle sales comprising ~$2.5 billion for Q3'22. It generates a gross profit from the different between the price it sells the vehicle for and the price it pays to acquire and prepare the said vehicle for sale.
Its bottom line, or net income, declined even more as a result of increasing costs. Net Income fell 784% from -$32 million in Q3'21 to -$283 million in Q3'22. While the Company did note that its business experiences seasonality, with sales peaking in Q'1 and diminishing throughout the year to Q'4. By comparing year-over-year for the same quarter and looking at gross profit per unit we can exclude the impact of seasonality. The number of vehicles sold as well as gross profit per vehicle declined, despite website visits increasing, as shown in its 10Q filing below.
As its financial performance continues to free fall Carvana had to lay off more than 1,500 employees. To make matters worse, Carvana's Novi, Michigan dealership lost its license to sell vehicles due to more than 100 customer title delays and probation violations, fraud, and destruction of documents.
Ernie Garcia, Carvana founder and CEO, commented, "We made significant progress in Q3 driving operational efficiencies despite the considerable headwinds facing our industry. Our committed team achieved notable cost reductions across our business while continuing to deliver exceptional customer experiences...This economic environment remains uncertain, but we are focused squarely on the goal of driving the business to profitability. While progress is rarely linear, we remain on the path to becoming the largest and most profitable auto retailer."
After a weak Q3, Carvana hired advisors to explore a potential restructuring plan in order to weather the storm that has ensued. Carvana's creditors, which include lending giants Apollo Global Management Inc.
Several of its creditors, which hold an aggregate of $4 billion of Carvana's unsecured debt, or around 70% of its total debt, have signed a cooperation agreement to negotiate together against Carvana on new financing or debt restructuring for the Company.
- https://www.businessinsider.com/used-vehicle-retailer-carvana-bankruptcy-car-buyers-inventory-2022-12
- https://www.axios.com/2022/12/16/carvana-posterchild-for-fed-easy-money
- https://www.wsj.com/articles/carvana-shares-tumble-as-company-taps-adviser-11670441546
- https://www.theverge.com/2022/11/9/23447764/carvana-98-percent-stock-price-market-cap
- https://www.cnbc.com/2022/11/18/carvana-to-lay-off-1500-employees-amid-economic-uncertainty-.html
- https://finance.yahoo.com/m/5e882d53-d188-3116-b1ac-c25b55cf4050/what-s-going-on-with-carvana.html
- https://www.fool.com/investing/2022/12/17/whats-going-on-with-carvana-stock/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article