What a difference a year makes.
Caravan, market and hedge fund dear just over a year ago, it is now disavowed by the same investors who seem to be speculating about its eventual bankruptcy and bankruptcy.
The numbers are terrible: the stock lost 13% in December. The month of November was brutal as Carvana shares fell 43%. The stock, which ended 2021 at $231.79, closed the Dec. 6 trading session at $6.71, representing a 97.1% decline in 2022.
Finally, the market capitalization has collapsed and now stands at $1.20 billion. In short, Carvana (CVNA) – Get a free report it will soon fall below $1 billion market cap. At the rate things are going, it looks like a possibility that is likely to happen very soon as the group’s investors and creditors have lost confidence. Assuming that’s the same number of shares, the market cap would be $41.45 billion on December 31, 2021.
Funds Apollo Global Management and Pacific Investment Management Co (PIMCO) have already signed a pact to join talks with the company to recover their investment, Bloomberg News reports. They are part of a group of funds holding about $4 billion of Carvana’s unsecured debt.
The duration of this pact is three months, which suggests that these funds are convinced that the company that would revolutionize the way used cars are bought will be in default very soon. Carvana’s bonds are indeed below 50 cents on the dollar. This means that the probability that Carvana will default is very high.
Founded in 2012 and based in Arizona, the company is taking advantage of favorable conditions to launch its new way of buying a car. The group’s car vending machines performed well during the pandemic, a period when consumers wanted to avoid physical contact as much as possible to limit their exposure to the virus.
The federal government had also flooded consumers with money through stimulus programs. Interest rates were almost zero, which meant that it cost almost nothing to finance the purchase of a vehicle.
In addition, car manufacturers’ supply chains were disrupted, making it difficult to produce new vehicles. Faced with these challenges, consumers turned to the second-hand market as the waiting time for new vehicles was long. Consequently, used car prices have soared, making it a good environment for Carvana.
Basically, all the winds were blowing in the right direction for the company.
I ran out of money
But now everything has changed completely for Carvana. The company is particularly facing the aggressive increase in interest rates by the Federal Reserve to fight inflation. Except this rate hike is a double whammy for Carvana. This increases the cost of credit for consumers looking to purchase a vehicle and also increases the cost of borrowing for businesses looking to invest.
Also, high interest rates are bad for Carvana because the group has a lot of debt and therefore owes millions of dollars in interest related to its debt. The company burned through more than $1 billion in cash through the first three quarters of the year.
Some analysts believe it could soon face a credit crunch.
“We now believe that without a cash infusion, Carvana will likely run out of cash by the end of 2023,” Bank of America Securities analyst Nat Schindler said on Nov. 30. And “there is still no indication of a potential cash infusion, for example from the Garcia family (CEO [Ernie Garcia] and his father the chairman) and it is impossible to predict if and when this will happen.
As a result, Schindler downgraded Carvana shares to neutral from buy.
Carvana did not immediately respond to a request for comment.
The company has between $6 billion and $7 billion in debt net of cash the balanceaccording to FactSet.
But Carvana isn’t profitable: Its adjusted EBITDA margin loss widened 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors assess a company’s financial health.
The company is slashing costs to stem the bleeding: After cutting 2,500 jobs in May, the company recently announced an additional wave of layoffs that will affect 8 percent of the workforce, or 1,500 employees.
But will it be enough to prevent the inevitable?