What happened
A day after Carvana (CVNA 0.29%) shares got a pop from the company adopting a "poison pill" to ward off unwanted suitors, the stock continues in the fast lane. Shares of Carvana are up more than 7% on Wednesday morning on growing investor hope that the used car retailer will be able to navigate through a rough patch that has pushed the business off course.
So what
It's been a difficult 12 months for Carvana holders. The stock is down more than 95% over the past year, and the company's core business is in a precarious position. A spike in used car prices during the pandemic took a dramatic U-turn in 2022, in part due to rising interest rates. Carvana is stuck with a lot of inventory purchased when prices were high that it must now try to sell into a weakened market.
On Tuesday, the company surprised investors by adopting a shareholder rights plan, sometimes referred to as a poison pill. The plan offers existing Carvana holders the right to buy shares at a discount in the event that any one investor acquired a 4.9% stake in the company, effectively diluting that investor's stake and making it harder for anyone to take control without management's blessing.
In most cases, a poison pill is a sign of a brewing takeover war, and the stock tends to surge on the announcement. But in Carvana's case, the company said it was trying to protect long-term shareholder value by preserving the net operating loss (NOL) carry-forwards and other tax assets. Businesses can use NOLs to offset future tax payments, meaning that in theory an entity could acquire Carvana, shutter the core business, and still come out on top by using Carvana's credits to cancel out earnings elsewhere.
Carvana stock is up again on Wednesday on the company's effort to get that core business into shape. The company has a deal to sell up to $4 billion worth of auto loans to Ally Financial, a move that would allow it to add cash to its coffers. Carvana had $477 million in cash as of Sept. 30.
Now what
Carvana has more than $7 billion in debt, a reminder of how precarious its position is, even assuming the Ally loan sale goes as planned. Investors should be encouraged by the efforts to add liquidity and preserve its assets, but they should also understand that this is still a weakened business that must navigate through significant challenges ahead. There is a real risk that the company's best path forward will involve a stay in bankruptcy.
For investors, Carvana at best should be a small part of a highly diversified portfolio. There is great potential in the idea of selling used cars online, but Carvana has a lot of work to do to get its business back on track.
