It's difficult to believe that just 15 months ago Carvana (CVNA -0.28%) was the darling of Wall Street. It was a business model perfect for a world in the middle of a pandemic, and investors believed as consumers rapidly adopted buying cars online, that the company's future was bright as could be.
My, how the mighty have fallen. A $10,000 investment in Carvana on Aug. 10, 2021, would be worth roughly $270 right now.
The more important question facing investors now is: Can Carvana be repaired, or is it headed for the junkyard?
How bleak is it, really?
Investors have a number of topics to consider when gauging just how dire the company's situation is: macroeconomic headwinds, financial distress, difficulty in raising capital, and slowing auto sales.
Carvana was once posting explosive growth. Remember that it took five years for the company to sell 100,000 total vehicles and by year seven it sold that many in one year alone. By year eight, it was selling 100,000 vehicles quarterly. In fact, Carvana was consistently posting triple-digit year-over-year revenue and units growth when you opened a quarterly report.
If Carvana's third quarter has made anything clear, it's that growth has come to a screeching halt.
Third-quarter retail units declined 8%, revenue dipped 3%, and total gross profit slumped 31%, compared with the prior year. For the first nine months of 2022, Carvana's net loss ballooned to $1.45 billion, compared with the prior year's net loss of only $105 million.
Just as troubling as Carvana's reverse in growth is that repairing the company could be just as difficult.
Mechanic or junkyard?
Here's a graph to emphasize Carvana's drastic cash burn.
Data by YCharts.
That spike in cash and cash equivalents was from its last round of capital raising, to fund Carvana's Adesa acquisition and for general operations, and it's already burned through a chunk of it. Carvana clearly doesn't have the cash flow to support its operations, which leaves it likely needing to raise capital again at some point. However, raising capital is going to be increasingly difficult or destructive.
The cost of raising capital
Data by YCharts.
If Carvana were to issue additional shares to raise capital, not only would it further dilute shareholders -- which have already felt the pain, as you can see shares outstanding rise in the graph above -- it would be issuing shares near rock-bottom prices.
If Carvana were to take on additional debt to fund operations, it would be doing so as interest rates rise, and as loaning entities would require higher interest due to the riskier nature of its business. In fact, look at Carvana's last round of senior notes and the interest rate compared with prior notes.
Image source: Carvana Securities and Exchange Commission (SEC) filings.
Morgan Stanley automotive analyst Adam Jonas had a $420 price target on Carvana shares as recently as February. And in the face of all these headwinds, he has quickly reversed and last week announced a $0.10-per-share worst-case scenario.
The bottom line
Not only is Carvana driving into uncertain economic headwinds and slowing auto sales, but it's also becoming increasingly difficult to fund its operations that aren't supported with free cash flow.
The scenario for investors is dire, and while the company has long-term potential and has made operational progress since its initial public offering, it's becoming increasingly difficult to see how the company can turn that long-term vision into reality.
Carvana appears to be closer to the junkyard than being repairable, and investors would be wise to explore other automotive investments for the time being.
