Carvana's (CVNA 0.31%) stock price plummeted 97% this year as investors fretted over the online used car dealer's slowing growth, widening losses, and exposure to macroeconomic headwinds. But after that harrowing decline, Carvana trades at just 0.1 times this year's sales. So could Carvana be a deep-value play at these prices?
What does Carvana do?
Carvana was founded 10 years ago, and it aimed to disrupt traditional user car dealerships with two main strategies. First, it streamlined the sales process with non-negotiable prices and a near-instant approval of financing and sales on its digital platform. Second, it built multi-story vehicle "vending machines" that required a lot less space than used car lots.
Image source: Carvana.
Buyers ordered their vehicles online and picked them up at those locations or had them delivered. That process also made it much easier for customers to sell their own used vehicles. Carvana says this business model, which is run entirely online, enables customers to "get the car without the car salesman." That's an attractive proposition for buyers who don't want to go to dealerships, haggle with salesmen, and deal with the byzantine financing process.
What happened to Carvana?
Carvana went public at $15 per share in 2017, and its stock eventually hit an all-time high of $370.10 last August. But today it's only worth about $8 a share. The following table illustrates why investors were so enthusiastic about Carvana last year -- and why that enthusiasm fizzled out throughout the first three quarters of 2022.
|
Metric |
2019 |
2020 |
2021 |
First 9 months of 2022 |
|---|---|---|---|---|
|
Revenue Growth (YOY) |
101% |
42% |
129% |
19% |
|
Retail Units Sold Growth (YOY) |
89% |
37% |
74% |
18% |
|
Gross Margin |
13% |
14% |
15% |
10% |
Data source: Carvana. YOY = Year over year.
Carvana's business remained resilient during the pandemic because it was built from the ground up as a digital business. It was easy to facilitate touchless pick-ups and deliveries, and it benefited from the closures of traditional dealerships. Used car prices also soared in 2021, driven by pent-up demand from the pandemic and a shortage of automotive components.
Unfortunately, Carvana's business model wasn't built to withstand the sudden spike in inflation and interest rates that occurred over the past year. Inflation curbed sales of big-ticket items like cars, while rising interest rates made it even tougher to finance those purchases. Elevated inventories of vehicles this year also caused used car prices to decline.
Simply put, Carvana thrives when interest rates are low, the economy is healthy, and inventory levels are lean. But all three of those pillars collapsed this year, and that pain could persist for the foreseeable future.
Carvana's slowdown wouldn't be too worrisome if the company were profitable, but it's not. Its net loss narrowed from $462 million in 2020 to $287 million in 2021, but widened to a staggering $1.45 billion in the first nine months of 2022. That sea of red ink, along with its $6.62 billion in long-term debt, make Carvana a risky stock to own as interest rates continue to rise.
What's next for Carvana?
Carvana's total retail units sold fell 8% year over year in the third quarter, representing its first quarterly year-over-year decline since its IPO. It didn't provide any clear guidance for the fourth quarter and beyond, but the current trend suggests its unit sales will continue to wither as long as interest rates keep rising and used cars continue to depreciate.
So for now Carvana is focusing on cutting costs as its top-line growth stalls out. It laid off 12% of its workforce this May, and it just announced plans to lay off another 8% of its remaining employees. But the near-term outlook is still dire: Analysts expect its revenue to rise just 9% this year and grow 2% in 2023, and for the company to remain deeply unprofitable in both years.
We should take those estimates with a grain of salt, but it certainly seems like Carvana's high-growth days are over. Investors looking for a similar used auto dealer might check out its traditional rival CarMax (KMX 0.84%), which faces similar near-term headwinds but remains firmly profitable by GAAP (generally accepted accounting principles) measures.
Carvana's stock might seem dirt cheap right now, especially when the similarly distressed CarMax trades at 0.3 times this year's sales, but it won't attract more bulls until it stabilizes its sales growth, narrows its losses, and reduces its debt. Investors should avoid this fallen high-growth darling until more green shoots appear.
