Hope springs eternal — among some retail traders, at least — for used-car retailer Carvana (NYSE:CVNA). Yet, a comeback probably isn’t in the cards for CVNA stock. A slew of downward-trending data points cast Carvana in a negative light, and the company’s debt burden threatens Carvana’s viability as a going concern.
For what it’s worth, Carvana managed to survive as a business for a decade. There’s nothing wrong with it, I suppose, if Carvana wants to celebrate “ten years of disrupting the automotive industry.”
In 2023, however, financial traders should wonder whether Carvana will last another decade, or even another couple of years. As we’ll discover, a big-bank analyst recently issued a dire warning about Carvana as the company attempts to navigate a challenging used-vehicle market.
CVNA Cliff-Dives After Carvana’s Earnings Announcement
Retail traders’ comeback fantasies were thoroughly crushed on Feb. 24, the day after Carvana released its fourth-quarter and full-year 2022 financial results. CVNA stock plunged 20.5%, landing at around $8 per share.
That might seem like a harsh market response, especially since Carvana achieved a 6% year-over-year (YOY) revenue increase in fiscal 2022. However, that moderate revenue improvement certainly doesn’t outweigh the slew of disappointing data points.
In the fourth quarter of 2022, Carvana sustained YOY decreases in retail units sold (-23%), revenue (-24%) and total gross profit (-63%). Furthermore, Carvana reported a Q4 2022 net earnings loss of $7.61 per share. That’s a staggering per-share loss; remember, CVNA stock recently traded at around $8.
Turning to Carvana’s full-year 2022 results, in YOY terms, the company reported decreases in retail units sold (-3%) and total gross profit (-35%). Additionally, Carvana incurred a painful net loss of $15.74 for the year.
Analyst Warns About Carvana’s Debt Load
In other words, the market’s deeply negative response to Carvana’s results was fully justified by the data. Clearly, there’s not enough evidence to construct a strong case for a CVNA stock comeback.
A major part of the problem has been Carvana’s acquisition of Adesa, a used-vehicle auction business. It was poor timing for Carvana to spend money buying out Adesa while the used-car market struggled under the weight of high inflation.
The Wall Street Journal concisely summed up the damage done by Carvana’s ill-timed Adesa buyout:
“The expensive debt with which the company financed the Adesa acquisition also bit in the fourth quarter, as the company paid $152 million in interest expense, equal to 79% of the company’s reported gross profit for the quarter.”
Now, Carvana is left with a debt burden that may be too much for the company to manage. Alarmingly, JPMorgan analyst Rajat Gupta expects Carvana’s current “cash liquidity” to last through the end of 2023.
That’s not a long runway, and Gupta also warned investors about Carvana’s “elephant in the room.” Specifically, the analyst cited the “$600 million of run-rate interest burden with management suggesting they are willing to add even more if needed for liquidity bandwidth in the near to medium-term.”
A Comeback Is Unlikely for CVNA Stock
Gupta is basically trying to tell investors that Carvana has a substantial debt load and has to pay interest on it. Moreover, the company might add to its debt burden soon. This, along with the company’s disappointing quarterly and annual fiscal results, spells trouble for Carvana.
Sure, it might be tempting to jump into the trade since CNVA stock is down from its early-February peak. Carvana has major financial issues, however, so don’t count on a share-price comeback happening in 2023.
On the date of publication, David Moadel 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.
