Why Carvana Stock slipped on Tuesday

What happened

Shares of carvana (CVNA 1.17%) collapsed on Tuesday, falling as much as 7.7%. As of 11:39 a.m. ET today, the stock was still down 1.7%.

The catalyst that brought the online car seller down was a report that it once again broke state laws.

So what

Reports emerged late Monday that Carvana’s license in Illinois had been suspended again, prohibiting the company from selling cars in that state.

The Law Enforcement Division of the Illinois Secretary of State’s Office reinstated the suspension, which had already been issued in May, accusing Carvana of continuing to issue temporary out-of-state license plates in Illinois, an illegal practice under state law. Regulators also allege that Carvana has consistently failed to process titles and registration documents in a timely manner, missing required deadlines.

It’s just the latest in a growing list of states that have cited Carvana for similar issues. Pennsylvania regulators have restricted the company’s ability to issue temporary permits, while Carvana has been on probation and off probation in a number of North Carolina counties and Michigan.

Now what

Investors have other equally pressing concerns about the e-commerce platform. Carvana sells cars on credit to consumers and then pools the debt in a process known as securitization. With interest rates rising and the economy slowly heading into recession, the days of low-cost borrowing are fast fading.

In an effort to rein in rising inflation, the Federal Reserve Bank has raised interest rates three times so far in 2022, and government bond yields are rising. As once-cheap debt becomes more expensive, the cost Carvana will pay for securitizing its loans will also increase. Although the company has other options, its results will continue to be limited as long as interest rates remain high.

Additionally, higher rates will weigh on consumers, most of whom will postpone buying a new (or used) car in the face of higher costs and continued economic uncertainty.

The combination of operational difficulties, rising costs and slowing sales growth is a perfect storm for Carvana. Until there is clarity on some of the longer-term issues, investors may want to give it a pass – at least for now.

Danny Vena holds positions at Carvana. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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