What happened
Shares of Carvana (CVNA -0.38%) were crashing today as several factors combined to send investors running for the exits. A broad pullback in stocks, coming after the Federal Reserve raised benchmark interest rates by half a percentage point yesterday, was the most evident reason, with tech stocks feeling the sting as the Nasdaq closed down 5%.
A number of its e-commerce stock peers also reported earnings last night and this morning, including Etsy, eBay, Shopify, and Wayfair, and all of the reports indicated a sharp deceleration in growth in the sector, which added to concerns about Carvana, the leading online car retailer.
Additionally, the stock got an analyst downgrade, and higher interest rates will make it more difficult for customers to buy cars, though it will also help its financing profits.
The stock closed down 18%.
Image source: Carvana.
So what
Headwinds against Carvana were already building following its first-quarter earnings report as the company continues to burn cash and as it ramped up vehicle inventory in a worsening economic environment.
Morgan Stanley's Adam Jonas essentially said as much this morning when he downgraded the stock from overweight to equal weight due to concerns about liquidity and costs. He noted the company admitted that it accelerated growth at the wrong time, during an economic slowdown. It could run into a liquidity crunch if capacity outstrips demand, Jonas said, and he lowered his price target from $360 to $105.
Shifting market sentiment was the other reason for the sell-off as investors have grown skeptical of high-growth, loss-making stocks like Carvana. With its business model, the company is also at risk of a decline in used car prices as that would devalue its inventory, and a pullback in prices is likely as interest rates rise.
Now what
According to some metrics, Carvana looks like a bargain down more than 80% from its peak just a few months ago. But the company could be squeezed, especially if interest rates and the economy sink into a recession. As long as it can survive, Carvana should see better times over the long term, but it could need to raise more funding in order to make it to the next bull market.
