When Carvana (CVNA -2.10%) stock climbed to $376.83 nearly a year ago, investors were undoubtedly in Carvana Nirvana. Fast-forward to mid-2022, however, and the stock has plunged beneath its March 2020 pandemic low.
Amid this gut-wrenching backdrop, fearless value investors might be tempted to jump in. Yet, let's not forget the old but still timely Benjamin Graham/Warren Buffett principle that price is what you pay, but value is what you actually get. So, is there any value to be gained from buying Carvana stock at its current price?
That's a tough question to answer, as it's difficult to find value in a stock when the company is beset with one problem after another. Not to be the bearer of bad news, but Carvana's issues aren't in the rearview mirror, and eventually, the shares might not have any value at all.
Attack of the zombies
Just recently, New Constructs CEO David Trainer dared to state overtly what some onlookers may have been thinking for a while now: Carvana's "dwindling cash supply, intense competition, and elevated valuation" put the company firmly in the living-dead category, and also put Carvana stock in danger of going to zero.
Trainer's barbs sting, but they're not unjustified. Competitor CarMax (KMX -1.82%) has more than triple the market cap of Carvana, is profitable while Carvana isn't, and sports an attractive trailing-12-month price-to-earnings (P/E) ratio of 16.56. Meanwhile, Carvana's valuation isn't just "elevated;" it's indeterminate, as there's no P/E ratio to speak of here.
Regarding the company's "dwindling cash supply," Trainer kindly filled in the blanks, observing that Carvana "has failed to generate positive free cash flow in any year since going public in 2017" and has "has burned through $8.3 billion" in free cash flow since 2016. So, point duly noted.
Other zombie-like signs include Carvana's dreadful first-quarter results, which included a loss of $2.89 per share, compared to the analysts' consensus estimate of a $1.44-per-share loss and the year-earlier quarter's loss of $0.46 per share -- results so bad that J.P. Morgan analysts described Carvana's Q1 as a "confidence-shattering quarter."
A reputational car wreck
Along with the dire fiscal data, Carvana may also be suffering from what public-relations consultants might refer to as "bad optics." Certainly, it's not a good look for Carvana to eliminate 2,500 jobs, or around 12% of its workforce, to "better align staffing and expense levels with sales volumes." (If it's any consolation, Carvana's executives are supposedly forgoing salaries for the remainder of the year.)
Additionally, Carvana might have earned a reputation for gambling when the company issued $3.3 billion worth of bonds at a jaw-dropping 10.25% interest rate, which reportedly exceeds the typical interest rate for junk bonds. This high-risk issuance is supposedly intended to finance the acquisition of Adesa U.S., a wholesale vehicle-auction specialist.
Perhaps most damaging of all, though, has been a recently published report that Carvana allegedly sold vehicles before the company legally possessed the title to them. Indeed, Carvana admitted that a small number of customers "did not receive permanent license plates or transferred title within the time frame set forth by the respective states." Anecdotal evidence from the report, in the form of horror stories involving people driving paid-for vehicles they weren't legally entitled to, certainly doesn't support the bull case for Carvana now.
Ultimately, whether the "zombie" label sticks and Carvana stock actually goes to zero remains to be seen. At the very least, Carvana has zombie-like traits and a public-relations nightmare on its hands. Going forward, prospective investors should monitor for further developments -- or better yet, a lack thereof. It would be encouraging if Carvana halted its layoffs and junk bond-esque issuances. Along with that, it would be great to see the company achieve something close to positive free cash flow, and a sub-$1 quarterly EPS loss (forget about profitability for the time being). While you're waiting for those miracles to happen, see whether Carvana can get its reputation back on track, or at least navigate its way through damage-control mode.
