Carvana (CVNA -0.36%) stock has gone from market darling to deadbeat in just a year.
Shares of the online used car dealer have collapsed as the company's business model has unraveled. Used car prices have spiraled lower, and the company went deeper into debt last May when it bought the car auction business ADESA.
Where will Carvana be in a year? A better question to ask is whether Carvana can survive its current cash crunch. Let's take a look at the challenges facing the company and its prospects over the next year.
Crash test
Carvana finished the third quarter with $316 million in cash and $6.8 billion in debt. It had an operating cash flow loss of $585 million in the first three quarters of the year and a free cash flow loss of slightly over $1 billion, showing the company is quickly burning through its cash.
On a GAAP basis, it lost $508 million in the third quarter and paid $153 million in interest expense. The fourth quarter could be even uglier for Carvana. The decline in used car prices has accelerated, according to data from the Consumer Price Index, falling 7.6%.
According to anecdotal reports, Carvana has been deeply discounting its vehicles in order to clear inventory and raise cash. The company also recently abandoned plans to open up a new vehicle reconditioning center in Arizona that was expected to cost $65 million. In November, it laid off 8% of its workforce, or 1,500 people.
Carvana also has nearly $2 billion available to borrow under a revolving credit facility, and it has $2 billion in real estate that it can use as collateral or in a sale-leaseback arrangement to raise capital.
The company's prospects will also depend on the Federal Reserve's actions and where interest rates go. Its short-term credit facilities are tied to the prime rate, so the company will owe more on interest if the fed funds rate continues to go higher. Rising rates are also bad for car buyers as they make payments more expensive. So higher rates would further slow the used car market, pushing prices lower.
Carvana can survive
The used car dealer's survival isn't certain, but with $4 billion in liquidity to tap, the company should be able to live to see another year. Though gross profit narrowed in the third quarter, it was still positive, showing the company can generate a gross profit even when used car prices are declining. The layoffs should also help the company cut overhead costs.
Some of Carvana's bond prices have fallen below 50 cents on the dollar, but those maturities are years away, meaning the discount reflects doubts about the business over the long term.
That makes sense, as the company has never been profitable on a GAAP basis, and was only briefly profitable on an adjusted EBITDA basis. If the company can survive its current cash crunch, it should emerge as a more efficient operation, though its debt and interest payments could also spiral out of control if it continues to borrow to stay afloat.
Carvana is clearly a high-risk stock at this point, but that's reflected in the share price. The company has enough liquidity to make it through 2023, but becoming a viable business over the long term is a different question. First, it must overcome the challenge in front of it for the stock to have a chance at recovery.
