Now Carvana faces tests. The tailwinds that drove growth – rising used car prices, low interest rates and the first mover advantage in online car sales – are fading. And the cash-burning business is years away from profitability.
Shares of Carvana are down two-thirds from their peak last year and are on course to lose all of their pandemic gains. The company’s bonds fell in price, reflecting the drop in other speculative investments. Falling stock prices and rising bond yields would make it more expensive for Carvana to raise the cash it needs to fund its growth.
“The long-term viability of the business is still a question mark,” said David Binns, analyst at S&P Global Ratings. The company classifies Carvana’s bonds as triple-C plus, meaning it needs favorable trading terms to repay its debt.
Investors expect the company’s chief executive, Ernie Garcia III, to answer those questions when Carvana releases its 2021 annual results on Thursday. Most pressing will be news about Carvana’s slowing growth.
Carvana said it would be inappropriate to comment before his results are announced.
Struggling with bottlenecks caused by its rapid growth over the past year, Carvana reduced its purchases of vehicles from individuals and limited the number of cars consumers could see on the site. “There is definitely a slowdown,” said Michael Baker, managing director of DA Davidson & Co. Some of that is due to Carvana’s decision to limit sales, while some is due to broader trends in the market, he said.
Analysts expect Carvana’s decision to limit its available cars to weigh on fourth-quarter sales, adding to a slowdown in the industry. Retail sales for the full year are estimated at around 430,000.
It could also push buyers, some of whom have complained of paperwork problems with their purchases amid Carvana’s rapid growth, to other sellers. “A customer who shows up on the website is less likely to find the car they want, which is by no means a perfect customer experience and that’s not what we’re aiming for,” Mr. Garcia said at a Wells Fargo investment conference Dec. 1.
Falling behind growing demand could be a temporary blow to a fast-growing business. Garcia told the conference he still sees the auto retail industry as ripe for disruption that will allow Carvana to create industry-leading profitability if it can sell enough. of cars. Garcia said he prefers to focus on growth rather than profitability because the economics of the business will be more favorable at scale.
Carvana has accumulated losses of more than $1.2 billion since the start of 2018. Since 2018, it has spent about $1.9 billion more than it made from car sales, to excluding inventory and consumer loan transactions, and sold stocks and bonds to fund the difference, according to JPMorgan Chase & Co.’s net sales for the period from early 2018 to September 30, 2021 was $20.5 billion.
Lower growth expectations put more pressure on the company to generate profits, as investors are less likely to pour money into a mundane company than into one with a bright future. Netflix and Uber used borrowed money to remake their industries. Investors may decide that Carvana is more like WeWork, the short-term office rental company that turned out to be a real estate company, not a tech disruptor.
JPMorgan analyst Rajat Gupta said in a January note that Carvana was still burning cash after 10 years in business. He said brick-and-mortar dealerships are moving into the online car sales market, finding new ways to grow. “We don’t necessarily view the company’s business model as being vastly superior or disruptive relative to the market,” he said.
CarMax, the country’s largest used-car seller by volume, sells twice as many cars as Carvana, mostly through 226 stores. Its online sales have doubled in recent quarters to reach 9% of cars sold.
Analysts and investors predict that Carvana will have to raise capital again and will not break even for a full year, at least until 2024.
To help drive growth, Carvana is building additional facilities to buy and prepare cars for sale, easing its bottlenecks. It currently has 14 such facilities, with a capacity to handle around 817,000 vehicles a year, and said it plans to have 21 in total by the end of 2022.
Stock analysts expect Carvana to invest between $400 million and $500 million in properties and new facilities in 2022, roughly matching their estimates of what the company spent in 2021.
Mr. Gupta said investments in Carvana’s infrastructure could provide a competitive advantage. He expects the company to generate full-year earnings before interest, tax, depreciation and amortization by 2023 and to have positive adjusted free cash flow by 2024.
Carvana financed some of its facilities by selling and renting them. This helps preserve cash, but adds to liabilities. As of September 30, the company owed $420 million under sale-leaseback agreements, adding to its total long-term debt of more than $3 billion.
Among the main draws on Carvana’s cash flow is its inventory of used cars, which it buys at wholesale auctions, from other retailers and directly from customers. The company had $2.3 billion in vehicle inventory on its balance sheet as of September 30, more than double what it had at the end of 2020.
Carvana, like other car dealerships, finances its vehicle purchases with a floor plan financing agreement. The company has increased its line of credit under the deal twice in the past three months, raising it in December to $2.25 billion from its previous cap of $1.75 billion, and again in February at $3 billion, although the line drops to $2 billion in September. .
This story was published from a news agency feed with no text edits
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