Carvana veers clear of junkyard—for now

Used-car retailer Carvana resembles a once-sleek race car that has found itself in the middle of a demolition derby. The hits just keep coming.

Things were already looking scary for its investors after a grim third-quarter earnings call in November. Then its stock fell 43% to $3.85 following reports in December that implied the company could be steering toward a restructuring. 

Notably, The Wall Street Journal reported in early December that Carvana was working with its legal counsel to evaluate restructuring options and that its creditors had signed cooperation agreements to ensure they work in unison if the company attempts to raise new debt. 

Since that scare, though, Carvana’s stock had inexplicably gained 162% through Thursday’s close, alongside other meme-stock favorites.

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The company’s fourth-quarter results, released late Thursday, were even more frightening. Carvana said that its revenue had fallen 24% during the period compared with a year earlier. 

Its net loss widened to a record $1.4 billion, nearly eight times the net loss it saw a year earlier and much worse than the $426 million loss that analysts polled by FactSet expected to see. Fourth-quarter cash burn (or negative free cash flow) of $800 million brought its 2022 total to roughly $1.8 billion—nearly its current market value.

USED-CAR PRICES UNEXPECTEDLY SPIKE AGAIN AS INFLATION FEARS RETURN

Guidance for the first quarter doesn’t look pretty, either. The company said it expects a sequential reduction in the number of cars sold in the current quarter as it tries to contain marketing costs and inventory size; Wall Street had been expecting it to increase. Carvana’s heavily shorted shares declined by a relatively mild 3.7% in after-hours trading following the earnings call.

There are two developments that could be leading some investors to hold on to their seats rather than get out altogether: One is that used-car prices resumed their upward trajectory after weakening significantly at the end of 2022. The Manheim Used-Vehicle Value Index rose sequentially in January, and then again in February. 

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Used-car prices in mid-February were 7% higher than they were in December, implying that gross margins for used-car sellers such as Carvana might not turn out to be so terrible in the current quarter. 

Carvana disclosed in mid-January that Ally Financial had committed to buy up to $4 billion worth of the used-car seller’s automotive finance receivables—a positive development for its liquidity position.

It is hardly out of the woods, though. Used-car prices are widely expected to decline this year, with J.P. Morgan forecasting a drop of 10%. Meanwhile, the company has roughly $1.9 billion in committed liquidity, which is a relatively short runway for a company that goes through cash very quickly. 

INFLATION MAY BE EASING BUT CAR INSURANCE ISN’T

Capital expenditures and interest expenses alone should add up to more than $700 million this year, and analysts are expecting a total cash burn of $1.2 billion. Although Carvana said it could raise an additional $2 billion through real estate financing, J.P. Morgan analysts think only about $1 billion of that can be realistically raised in the current market.

Carvana is still going, but the scrap heap isn’t quite out of its view.