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Why and KAR Auction Dropped by Double Digits While Carvana Popped 10%

By Daniel Miller – May 7, 2020 at 4:36PM

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Here are the driving forces behind volatile automotive stocks Thursday.

What happened

Shares of (CARS 4.43%), KAR Auction Services (KAR 6.98%), and Carvana (CVNA 5.71%), are trading all over the map Thursday as and KAR Auction are down 18% and 11%, respectively, while Carvana is up 10% on a wealth of earnings reports and a sign of optimism from Lyft (LYFT -1.67%).

So what

Let's point out something that investors need to keep in mind currently: There is simply a lot of market volatility amid the coronavirus pandemic. Just yesterday soared 34% after it handily beat analysts' estimates during its first quarter, only to give a chunk of those gains back today as investors may have realized that despite a great quarter we are far from the end of COVID-19's financial impact. Management told investors effects of the COVID-19 pandemic will have negative impacts on operations, cash flow, and its financial position, and the second quarter is almost certainly going to be worse than the first quarter.

KAR Auction's stock declining probably shouldn't come as a shock, as auction services have slowed significantly amid COVID-19 and used car prices have plunged as off-lease vehicles stack up. The first-quarter financial impacts, even with most of the first quarter being free of COVID-19 restrictions, were noticeable: Revenue declined 6% compared to the prior year, and net income from continuing operations dropped 82%. Management noted there was serious disruption to its business in the second half of March 2020, and that it halted its physical auctions, has withdrawn financial guidance for 2020, and suspended its dividend.

Carvana car vending machine.

Image source: Carvana.

Carvana has had quite the trading day as it opened 10% lower before recovering to a 10% gain by Thursday afternoon. After hours yesterday, Carvana reported first-quarter revenue in line with estimates at $1.1 billion, but it posted a wider-than-expected bottom-line adjusted loss of $1.18 per share. COVID-19 restrictions certainly had Carvana spinning its tires in March and slowed its first-quarter revenue growth to a modest 45%. You're probably thinking 45% growth is still amazing, and for most companies it would be, but Carvana is only a couple quarters removed from posting its 23rd consecutive quarter of triple digit revenue growth during the third-quarter 2019. Despite the initial slowdown, Carvana is almost perfectly built to sustain, or possibly even benefit from, COVID-19 with a surge in online car buying.

Now what

Stock price pops and drops of 10% or more will be common during COVID-19, especially in the hard-hit auto industry, as economic sentiment will vary greatly day to day. One positive takeaway Thursday was that ride-hailing service provider Lyft admitted it had a terrible April with ridership down 75%, but that already there is a trend line showing recovery with ridership growing over the past three weeks as some states begin loosening stay-at-home restrictions.

Only time will tell how quickly the U.S. will get COVID-19 under control, and when consumers will fully rebound, but until then take these stock price swings with a grain of salt and keep in mind whether companies have balance sheet strength to weather the storm and a long-term strategy to execute in the post-COVID-19 environment.

Daniel Miller 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.

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Stocks Mentioned

KAR Auction Services, Inc. Stock Quote
KAR Auction Services, Inc.
$11.95 (6.98%) $0.78
Carvana Stock Quote
$21.46 (5.71%) $1.16 Inc. Stock Quote Inc.
$12.01 (4.43%) $0.51
Lyft, Inc. Stock Quote
Lyft, Inc.
$12.95 (-1.67%) $0.22

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

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