Shares of the online car retailer Cavana dropped more than 50% over the past two days while dropping 18% in early trading on Monday morning. Wall Street is questioning the company’s business model after a mixed third quarter.
Carvana reported a loss of $186 million for the fourth quarter, and analysts are not happy about it. Growth has slowed, and investors think that Carvana does not have brands, buyers, or profitable business models to drive future growth.
On Monday, Carvana was one of the most active stocks on Yahoo Finance’s ticker page.
The slide in Carvana stock began with the influential Morgan Stanley auto analyst Adam Jonas.
Financial bloggers believe Carvana shares could fall as low as $1. The reasoning behind this prediction is that the weak used car demands and rising interest rates are taking a toll on Carvana’s already less-than-perfect financial statements.
One of the biggest challenges for Carvana is simply finding enough funding as the environment for startups has become very tough, Jonas said.
Other analysts on the Street echoed Jonas’s concerns. “Carvana is taking action to ride out a challenging demand backdrop that is likely to linger into 2H23 (or longer) in our view,” Evercore ISI Analyst Michael Montani wrote in a note to clients.
The analyst said that if Carvana can’t turn EBITDA positive by the second half of coming year, it may lead to asset divestitures, sale-leasebacks, delays to its acquisition of Adesa’s auction arm, and the need for more capital. That would include money from the founder’s family.
Montani calculated that Carvana has $4.4 billion in liquidity to help it ride out a rough six to nine months.
Shares of Carvana briefly halted Monday morning due to volatility, dropping below $7 per share — the lowest point it’s ever been.
On Tuesday, Carvana’s stock volume spiked. Up 9.2 million shares in just 22 minutes. It’s more than 65% of their 30-day average volume, which was 14.14 million shares.
Carvana shares have plummeted by 97% this year. After achieving an all-time intraday high of $376.83 per share on Aug. 10, 2021, the stock hit an all-time low of $6.68 per share on Monday, recovering slightly to about $7.50 a share off roughly 14%.
On Monday, Carvana stock dropped for the first time since its IPO. The decline came after Carvana missed Wall Street’s expectations for the third quarter, as demand, pricing, and profit have decreased from record levels during the coronavirus pandemic.
The Manheim Used Vehicle Value Index, which tracks the prices of used vehicles sold at Cox Automotive’s U.S. wholesale auctions, has fallen by 15.4% this year through October after peaking in January. This index result includes a 2.2% decline from September to October alone.
Retail prices typically follow changes in wholesale value. That’s good news for potential car buyers but not great for companies like Carvana that purchased vehicles at a premium and are now trying to sell them at a profit.
On Friday, Morgan Stanley pulled its stock’s rating and price target in response to the deterioration in the used car market and volatile funding environment.
The prices and profits of used vehicles have increased significantly as people who couldn’t find or afford a new vehicle started buying used cars. This result is because inventories of new cars were taken down by the pandemic, primarily due to supply chain problems, including an ongoing global shortage of semiconductor chips.
Though Carvana and other used vehicle companies such as CarMax have seen success over the years, they are currently experiencing financial woes. The fear of inevitable recession, both in America and abroad, has led to a contraction in the market. And with rising interest rates and inflation, consumers are less willing to pay record prices for vehicles.
During a Thursday call, Carvana co-founder and CEO Ernie Garcia shared his thoughts on the company’s future. He described next year as “difficult” for Carvana, as used car prices are becoming more normalized, and interest rates may increase.
According to Garcia, the third quarter was the “most unaffordable point ever” for car buyers who finance their purchases.
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