Perhaps no other stock has divided the investing community more than Carvana (CVNA 2.19%). Bulls point to the online used car retailer's innovative business model and massive addressable market. And bears quickly call out the company's deteriorating financials as it's teetering on the brink of bankruptcy.
Amid macro headwinds, the stock fell a jaw-dropping 98% in 2022, forcing many investors to question what to do with their investment. Should you buy, sell, or hold Carvana this year? Let's take a closer look at what's happening with this auto stock.
Falling on hard times
Between 2016 and 2021, Carvana increased units sold from 19,000 to 425,000, with revenue skyrocketing from $365 million to $12.8 billion during the same time. This easily made it one of the fastest-growing enterprises out there, bolstered more recently by low interest rates, pandemic stimulus measures, and struggling supply chains that kept demand and prices for used cars up.
After hitting a pandemic low in March 2020, the stock climbed over 1,100% to its all-time high in August 2021.
Then 2022 arrived and with it came severe headwinds. Rapidly rising interest rates and falling used car prices contributed to a reversal in the robust backdrop that Carvana depended on for its quick expansion. Year-over-year revenue growth started decelerating in the first quarter of 2022, and it went negative in the third quarter. Unit sales have started to come down as well, while net losses are soaring.
Normally, this wouldn't be a huge cause for concern. However, Carvana is heavily indebted. And in December, the company's largest creditors agreed to work together in the event of bankruptcy or restructuring. This group owns $4 billion of Carvana's outstanding unsecured debt. As of Sept. 30, the business had $7.1 billion in total debt compared to $4.4 billion of total liquidity resources.
When the tide turned last year, it became plain how extremely dependent Carvana was on a booming macroeconomic environment for its own success. I think this is a prime example of a business that tried to grow too quickly, investing aggressively to expand across the country. When demand slowed down, its finances took a turn for the worse.
What should investors do?
Even though Carvana was able to register monster growth (up until 2022) by disrupting a gargantuan industry with a far superior customer experience, I can't recommend readers go out and buy shares in the business right now, especially since a major restructuring could be on the horizon. The uncertainty is simply too high.
So the smart financial decision is to pass on the stock if you've been on the sidelines. It's hard to imagine a scenario in which new shareholders won't be checking their Carvana stock quote nonstop, behavior that isn't healthy.
On the other hand, if you've already owned Carvana stock and are sitting on huge paper losses, it might be worth holding, instead of selling out completely. At its current market capitalization of $1.3 billion, I think Carvana's upside potential is greater than the downside risk (a concept known as asymmetric payoff), particularly as it trades at a price-to-sales ratio of under 0.1.
Let's say that the company is able to secure funding that doesn't significantly dilute existing stock owners, and this buys it enough time to weather whatever negative economic circumstances come in the U.S., even if things get worse.
A valid argument can then be made that Carvana will return to its impressive growth streak in a more robust economy, taking market share in the $1 trillion domestic used-car industry and being the dominant player in the auto e-commerce space. Moreover, management might be a bit more cautious when investing in growth initiatives after learning its lesson in 2022.
The result could be a business that is worth many times its current value. But investors would need to practice some serious patience in the meantime. If you can't stomach owning this stock anymore, then it's probably best to sell. It all comes down to your perspective on the Carvana story and your tolerance for uncertainty. In any case, this company has now become a speculative bet.
