Carvana Co (NYSE: CVNA) has pretty much been in a free fall this year, now down more than 95% versus the start of 2022 leaving investors with the most obvious question – is it an opportunity to buy at an unprecedented discount or is it a value trap?
Last week, the Tempe-headquartered company reported a broadly disappointing third quarter. Not only did it come well below the Street estimates, it was actually significantly shy of last year on almost all metrics.
Without a doubt, this once a growth stock is a victim of macro headwinds. Unfortunately, though, what’s hitting it harder is a company-specific issue, i-e, the net debt.
Carvana has over $5.0 billion in net debt on its balance sheet versus a little more than $1.0 billion in cash and equivalents. Earlier this year, the online used car retailer spent $2.20 billion to buy ADESA’s U.S. physical auction business from KAR Global.
While that might have been a “strategically” smart move considering it unlocks growth opportunities, the timing was rather poor as it added significantly to its already inflating debt burden.
Making it worse for Carvana stock is the macro environment. The used car market is evidently slowing down in the face of higher rates (source) and fears of an economic recession that’s making it less affordable for consumers to buy a second-hand car.
On the earnings call last week, management itself agreed that the next year was going to be a difficult one for Carvana Co. Put together, all of that speaks to a real possibility that this pandemic-darling may eventually have to file for bankruptcy.
Citing these concerns, Morgan Stanley’s Adam Jonas warned this morning that the Carvana stock could be worth only 10 cents in the worst-case scenario.
While the company is continuing to pursue cost-cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment (bonds trading at 20% yield) add material risk to the outlook.
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