Carvana's (CVNA -3.10%) stock hit an all-time high of $370.10 on Aug. 10, 2021. Investors were impressed by the online used car dealer's robust revenue growth, expanding gross margins, and narrowing losses. Carvana benefited from the post-pandemic acceleration in auto sales, even challenging traditional dealerships with its online platform that simplified the financing process, set firm prices, and enabled its customers to "get the car without the car salesman."
But by the end of 2022, Carvana's stock had dropped below $5 a share. Used car prices fell sharply as the vehicle shortage turned into a supply glut, inflation curbed consumer spending on big-ticket items like cars, and rising interest rates made it more difficult to finance those purchases. Carvana's lack of profits, high debt, and dwindling liquidity also made it a risky stock to own as interest rates continued to rise.
Does this beleaguered stock actually have a chance to bounce back over the next 12 months?
Carvana's biggest problems
Carvana's revenue rose 101% in 2019; grew 42% in 2020, even as the pandemic disrupted traditional dealerships; and soared 129% in 2021. But in the first nine months of 2022, its revenue only grew 19% year over year to $10.8 billion as the market's demand for used vehicles cooled off.
Carvana's gross margin expanded from 13% in 2019 to 15% in 2021 but dropped to just 10% in the first nine months of 2022 as used car prices fell. Its net loss narrowed significantly to $287 million in 2021 but widened to a whopping $1.45 billion in the first nine months of 2022.
Carvana only held $477 million in cash, cash equivalents, and restricted cash at the end of the third quarter. It was also shouldering $9.25 billion in total liabilities -- including $6.62 billion in long-term debt. In early December, Carvana's three biggest creditors, which hold about 70% of its debt, agreed to work together to force Carvana to restructure its debt or secure fresh financing. That rare alliance between its creditors suggests fears are rising that Carvana might seek Chapter 11 bankruptcy protection.
Will Carvana run out of cash in a year?
Several analysts, including Bank of America's Nat Schindler and Jefferies' John Colantuoni, believe Carvana will simply run out of cash within a year if it doesn't secure new financing.
Carvana's long-term debt is currently split into five tranches maturing in 2025 ($500 million), 2027 ($600 million), 2028 ($600 million), 2029 ($750 million), and 2030 ($3.28 billion). That final tranche was issued to fund its $2.2 billion acquisition of the online used car auction website Adesa U.S. in May 2022.
Carvana still has time to get its finances in order before its first tranche of debt matures in 2025. However, it's still paying high interest rates of 4.875% to 5.875% for its first four tranches of debt and 10.25% for the 2030 tranche. So the company will likely need to secure fresh funds at even higher rates as its core business deteriorates.
In the first nine months of 2022, Carvana's interest expense rose 175% year over year to $333 million and gobbled up 32% of its gross profit -- compared to less than 9% of its gross profit a year earlier. If its net losses continue to widen and its liquidity dries up, it probably won't have enough cash left by the end of 2023 to fulfill its interest payments.
As of this writing, Carvana's October 2025 bonds are trading at about $0.44 on the dollar, implying it has less than a 50% chance of paying back those creditors. Meanwhile, analysts expect Carvana to post net losses of $1.83 billion in 2022, $1.42 billion in 2023, and $1.09 billion in 2024. So it probably can't stave off a bankruptcy protection filing unless it raises a lot more cash.
Carvana is simply too risky to own
It seems unlikely that Carvana can raise enough cash at reasonable rates in this tough market. It might liquidate some of its inventories, reduce the size of its workforce, and implement more cost-cutting measures to slow the bleeding, but its long-term prospects won't improve until interest rates stabilize and used car prices rise again.
Unfortunately, Carvana's balance sheet suggests it could easily file for bankruptcy protection before those green shoots appear. On the bright side, Carvana might still be bought out by a larger competitor like CarMax, which is firmly profitable at a slight premium to its all-time lows. Yet investors should never invest in a broken business just because it might be acquired. Carvana might look cheap at less than 1 time next year's sales, but it's simply too risky to buy as a turnaround play.