Carvana’s business model of dispensing used cars like candy bars is suddenly struggling as its shares have now lost 98% of their value as of November 2022. The stock price could fall even further to as low as $1 per share. The reasons for the steep drop include declining industry demand, a weaker cash position, less profit from selling loans, poor credit rating, and a gloomy economic forecast.
A Disappointing Third Quarter for Carvana
Carvana did one of the worst things a company can do by falling short of expectations. The company missed the top and bottom line Wall Street expectations for Q3. Carvana’s revenue fell by 2.7%, and its per-share loss was larger than expected as well. Gross profit decreased by a large margin of 31%, and retail unit sales went down by 8% compared to the previous year. The per-unit gross profit also went down by over 24%.
In other words, Carvana lost across the board for Q3, and the main reason is simply that buyers are struggling to afford what the company sells. Loans for used cars now have payments of 160% more than before the pandemic.
Industry Demand Has Decreased
Used car retailers did quite well during the pandemic. During the pandemic, the inventory of new cars fell way below demand due to supply chain shortages. Customers who couldn’t find a new vehicle turned to the used car market, which in turn drove up prices and profits to record amounts.
In 2022, that demand has reversed course. Now, customers are beginning to pull back from record prices and rising interest rates. The demand has dropped sharply in response. Carvana, as a major retailer of used cars, has naturally felt the pinch.
The other problem for Carvana and other retailers that only sell used cars is that new car inventories have gotten a lot better. Consumers with good credit and plenty of cash are turning to the new car market more than ever.
Weak Cash Balance
Carvana lost a truckload of its cash balance between June and September of 2022. The total balance went down by $734 million, which leaves Carvana with only $316 million. Carvana has attempted to reassure investors by saying that it can borrow $2 billion to buy more cars and make loans. It also expects to make another $2 billion from real estate.
However, experts have said that Carvana needs even more capital, or it won’t be able to meet financing requirements through 2023. Financial experts also think that Carvana has an overly optimistic opinion on its cash-raising ability.
All of these issues have also led to Carvana taking a tumble in its credit rating. The company now sits at Caa1. The reasons for the downgrade, according to Moody, are weak credit metrics, negative free cash flow generation, lack of profitability, and more.
Long-Term Optimism for Carvana
The vending machine auto retailer has a long road ahead to recovery. Market issues, as well as some states banning Carvana from doing business, are substantial obstacles to overcome. Ultimately, Carvana is not optimistic about 2023 at this point, but the company does believe it will recover and have a bright future.
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