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Proprietary Data Insights Financial Pros Auto Retail Searches in the Last Month
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Auto Retail |
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The Stoned-Freshman Idea That Went Public |
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Honestly, it seemed more like an idea a stoned freshman thought up. Yet pundits labeled the company a “disrupter” in the car industry. And Carvana (CVNA) went public and won the hearts of investors, despite being a giant car vending machine. It wasn’t until interest rates rose that the house of cards collapsed. Ironically, that’s made the stock more popular than ever. As financial pros sift through the rubble to find a hidden gem, Carvana’s name climbed in number of searches in our proprietary Trackstar database. Sure, interest surged when the company reported earnings on November 3. But after declining to pre-earnings levels for several days, financial pros’ searches surged beyond those during earnings. The reason? People questioned the company’s solvency. Shares are down more than 90% YTD. Folks wonder whether that makes this a bargain or a bankruptcy-in-waiting. We reveal which below. Carvana’s Business Carvana is the leading e-commerce platform for buying and selling used cars. Customers can buy and sell cars through its app and website, carvana.com. The company offers more than 70,000 cars for purchase and financing. It also offers trade-ins. CVNA differs from traditional auto dealerships in that everything happens online. Customers don’t have to negotiate with salespeople. They can sign contracts and schedule delivery or pickup at one of Carvana’s patented automated Car Vending Machines. Another unique feature Carvana provides is as-soon-as-next-day delivery to customers in over 300 U.S. markets. As you can imagine, shares rocketed during the pandemic, climbing as high as $376 in August 2021. But they’ve rapidly declined ever since. In Q3 2022, the company sold 102,570 cars, an 8% drop YoY. Its gross profits of $359 million were 31% lower than in Q3 2021. The firm’s gross profits per unit have massively declined too, a 25.1% fall from $4,672 in Q3 2021 to $3,500 in Q3 2022. Source: Carvana CVNA blames retail depreciation, greater inbound transport costs, and higher reconditioning costs. Financials Source: Stock Analysis
While CVNA’s revenue has surged incredibly from $1.95 billion in 2018 to $12.8 billion in 2021, the company is holding on by a thread. The firm faces a massive cash crunch from high debt and rising interest rates. It has $600 million in annual interest rate payments and is quickly burning through its $6.6 billion long-term payable notes since it loses cash from operations. In fact, Bank of America analysts believe CVNA may run out of funds by the end of 2023 if it doesn’t get a cash injection. The firm has $666 million in cash and $8 billion in total debt. It recently laid off 8% of its workforce but still faces several challenges. Meanwhile, the firm’s inventory is worth $2.6 billion. Valuation Source: Seeking Alpha CVNA has no P/E GAAP ratio. That’s not the case with most of its peers. For example, EVgo (EVGO) isn’t profitable either, but Sonic Automotive (SAH) has a P/E GAAP ratio of 5.7x, Arko Corp. (ARKO) 17.3x, and Monro (MNRO) 30.6x. Based on price-to-sales ratio, CVNA is cheap. It trades at a price-to-sales ratio of 0.05x, notably better than its peers. MNRO is at 1.1x, EVGO is at 12x, ARKO is at 0.13x, and SAH is at 0.15x. But cheap is reasonable only if the company can survive. Profitability Source: Seeking Alpha CVNA reported a brutal -302% return on equity. On the other hand, MNRO has a return on equity of 6.7%, EVGO is at -23.6%, ARKO is at 20.2%, and SAH is at 35.5%. Carvana’s EBITDA margin of -6.3% isn’t pretty either. In contrast, MNRO’s is 12.3%, EVGO’s is NM (not meaningful), ARKO’s is 0.8%, and SAH’s is 5.3%. Even scarier is Carvana’s gross profit margin, which is tiny at 10.8%. MNRO is at 34.4%, EVGO is at 29.5%, ARKO is at 12.1%, and SAH is at 16.7%. Growth Source: Seeking Alpha Despite its rapid growth of 33.3% YoY, CVNA isn’t growing fast enough to service its debt. Its peers have also experienced positive growth. MNRO is at 5.4%, EVGO is at 78.3%, ARKO is at 32.3%, and SAH is at 13.1%.
Our Opinion 1/10 Carvana shares are cheap for a reason. The company is quickly becoming a penny stock and isn’t likely to survive. The economic environment for Carvana’s business isn’t great. It faces higher interest rates and a potential recession in 2023. Shares have declined nearly 97%. While that might sound like a buying opportunity, the firm is drowning in debt. We’d stay far away from CVNA. And a quick note for those thinking about short selling the stock: Don’t. Plenty of folks are already on that train. The last thing you want is to get caught in a short squeeze that rallies shares 100% in a few days before its eventual collapse. |
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