Please ensure Javascript is enabled for purposes of website accessibility

Why Carvana Tanked 33.6% in March

By Andrew Tseng - Apr 6, 2020 at 6:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is the sell-off overdone?

What happened

Shares of Carvana (CVNA -2.04%) tanked 33.6% last month, according to data from S&P Global Market Intelligence.

So what

It's clear that the huge move in Carvana's stock price last month was driven by the U.S. coronavirus outbreak. With initial unemployment claims soaring to over 3.3 million during the week ending March 21, and then to 6.6 million during the week ending March 28, there are certainly fewer people who would consider buying a car today than a month or two ago.  

What exacerbated the downturn in Carvana's shares was the company's relatively weak balance sheet and high cash burn rate. As of the end of last year, Carvana's balance sheet included $932 million in debt and just $76 million in cash, while the company reported negative-$988 million of free cash flow last year. 

A young woman in a car being handed the keys.

Image source: Getty Images.

The company is adjusting to the new environment by pausing new market openings and car vending machine launches, as well as "significantly reducing growth expenditures on new hiring, travel, facilities, and IT investments." The company has also "rebalanced our marketing, staffing, and purchasing levels to align with demand, while closely monitoring key metrics to determine when and how quickly to adjust."  

The company has recently doubled its auto loan purchasing agreement with Ally Financial, which should allow the company to sell more of its finance receivables to Ally. That should help the company's cash and liquidity position. 

And on March 30, the company announced it was selling 13.3 million new shares to certain existing investors at a price of $45 per share. The transaction resulted in gross proceeds of $600 million, including $25 million each from Ernest Garcia III, the company's founder and CEO, and his father, Ernest Garcia II, the company's controlling shareholder.

Now what

These actions are probably enough to shore up the company's financial position, at least for the forseeable future. It's possible that Carvana could benefit from COVID-19 in the long run because of its entirely online car buying experience and delivery straight to customers' doors. The company is even touting its new "touchless delivery" experience and has even added the language "the safer way to buy or trade a car" to its recent advertising.

For investors who believe in the company's long-term potential, this new lower price could be an opportunity.

Andrew Tseng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Carvana Stock Quote
Carvana
CVNA
$51.04 (-2.04%) $-1.06
Ally Financial Stock Quote
Ally Financial
ALLY
$35.50 (-0.87%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.