Carvana (CVNA 5.85%) has emerged as a battleground stock in recent months after the online used car dealer plunged sharply last year.
No stock loses 98% of its value by accident, and Carvana certainly has its share of problems. The company has never been profitable on a GAAP basis, and it's been hit by multiple headwinds in recent months, including rising interest rates (which make car loans more expensive), falling used car prices (which cause inventory to depreciate), and an ill-timed acquisition of the ADESA car auction platform.
With the stock down so far, is there a buying opportunity here or is this a value trap? To debate the subject, we asked a bull and a bear to weigh in on the stock.
Image source: Carvana.
Bankruptcy fears are exaggerated
Jeremy Bowman: There's no question that Carvana is in a weak position right now. But the question to ask about the stock isn't whether the business is damaged, but how it compares to the stock price. Carvana currently has a market value of just under $2 billion, which compares to trailing four-quarter revenue of $14.5 billion, or a price-to-sales ratio of just 0.13.
Much of the stock's recent collapse can be attributed to predictions that it will go bankrupt. Its debt was trading at below $0.50 on the dollar at one point, and creditors even formed an alliance to stick together in the event of a bankruptcy.
However, bankruptcy doesn't seem imminent. The company finished the third quarter with $316 million in cash and cash equivalents, and it also has $1.96 billion in short-term credit facilities it can tap. Beyond that, Carvana has more than $2 billion in unpledged real estate and other assets that it can use to borrow if it needs to do so.
Carvana has $213 million in debt due this year, and the earliest maturity on its long-term debt is in 2025.
As far as the business goes, there are also signs that the decline in used car prices may be over. The Manheim Used Car Index showed that prices actually rose 1.5% from December to January. Meanwhile, Carvana has been laying off staff and slashing costs, which should help move it toward profitability. If the company can make it through the current crisis and used car prices start to rebound, the stock should emerge in a better place.
Carvana kept buying used cars as demand slowed
Parkev Tatevosian: My bear case on Carvana starts with its extensive near-term headwinds. The company thrived during the earlier stages of the pandemic as the business conditions during the outbreak worked in its favor.
Car manufacturers had difficulty securing the supplies to produce enough cars to meet consumer demand. That created a surge in demand for used cars. Enter Carvana, which buys and sells used cars. The company, perhaps expecting the surge to continue, aggressively bid to purchase used cars from folks so that it had inventory to sell. Today, it has excess inventory that it overpaid to purchase. Simultaneously, it's running short on cash.
As of its latest update, Carvana had $316 million of cash on hand. To put that figure into context, Carvana lost $585 million in cash flow from operations in the nine months ending Sept. 30, 2022. At that rate, the company could run out of money in seven months. That means it either needs to sell more equity to raise cash or go out into the debt markets to borrow.
Thankfully, the stock price has soared to start 2023, up 141% year to date. That could help raise some much-needed capital. Still, Carvana needs to rethink its business model to put it on a sustainable footing in a slower-demand environment. As an investor, I wouldn't want to be a shareholder while Carvana tries to figure out this complicated dilemma.
