The prices of used cars have skyrocketed in the past few years. Coming out of the pandemic, supply-chain constraints made it difficult for people to get their hands on new ehicles, pushing many people to the used car market. Consequently, the demand for and prices of used cars, trucks and SUVs spiked. Automotive industry expert Edmunds points out that loans taken out by American consumers to finance a used car purchase is at all-time high. However, it looks like the used car market is entering a correction, with some analysts forecasting an impending collapse. The Manheim Used Vehicle Value Index showed that used car prices dropped 14.9% year-over-year in December 2022, the largest annualized price decline in the 26-year history of the index. That type of decline could spell big trouble for certain companies and their shareholders. Here are three stocks to sell as used car prices plummet in 2023.
By most metrics, Carvana (NYSE:CVNA) stock has already collapsed. How else to explain a 95% decrease in the company’s share price over the last 12 months? In August 2021, CVNA stock was trading above $350 a share. Today the stock sits at $7.35.
The massive decline stands out even in a terrible market. The online-only used car dealer that is known for its unique, multi-story “car vending machines” has run into multiple problems.
Surging prices and sky-high interest rates have conspired to reduce consumers’ demand for vehicles at the same time the company over-built and over-expanded its operations, taking on huge sums of debt in the process.
Carvana’s numbers look grim. The company’s profit per vehicle dropped 25% in 2022, and its total debt stands at $9.25 billion with only about $650 million of cash on hand. And the company most recently reported a per-share loss of $2.67. Many analysts are now predicting that Carvana will go bankrupt.
There are media reports that Carvana’s creditors have signed an agreement on how to handle negotiations with CVNA if it goes bankrupt. That’s not a good sign.
Though not as horrifying as Carvana’s performance, CarMax (NYSE:KMX), another used car dealer, has also taken a beating over the last year, with its shares declining nearly 40% during that period. A more established used car dealer than Carvana, CarMax has been in business since 1993 and today has nearly 250 dealerships across 41 U.S. states, in addition to a robust online presence. The Virginia-based company also operates an automotive-financing unit.
This past December, CarMax reported ugly third- quarter earnings that showed the toll that the decline of the used car market is taking on the company. Specifically, CarMax reported that its earnings per share had tumbled 85% versus the same period a year earlier, well below the EPS of 64 cents that Wall Street analysts, on average, had expected.
The company’s revenue fell 24% to $6.51 billion and it reported that it had sold 21% fewer vehicles than in Q3 of 2021. While it may not be on the verge of bankruptcy like its rival, CarMax is struggling as the used car market corrects.
Vroom (NASDAQ:VRM) is another online-only used car dealer whose share price looks to have already imploded. Now trading at just $1.02, VRM stock has plummeted 85% over the last 12 months. A pure e-commerce company, Vroom handles the entire used car buying process online with no-haggle pricing. The company also offers financing and delivers refurbished vehicles to customers nationwide in the U.S.
A smaller player than either Carvana or CarMax, the unprofitable Vroom was struggling before the used car market began turning south in the second half of 2022. On Nov. 7 of last year, Vroom reported total debt of $1.01 billion against total assets of $1.81 billion, making its situation increasingly precarious.
In mid-January of this year, the company announced that it was cutting 20% of its workforce or about 275 positions as it looks to reduce costs and conserve cash. Any further decline in the used car market may push Vroom into bankruptcy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.