After dropping 33% in 2022, the Nasdaq Composite Index got off to a strong start in 2023, rising 17% between the start of the year and Feb. 2. But since then, the popular index is down a little less than 7%.
Carvana (CVNA -3.36%) hasn't been spared from the chaos. Although the stock is up 73% in 2023, it is still down 98% from its peak, and it dropped substantially after posting its latest financials last week. Is this struggling business too cheap to ignore at this point? Let's take a closer look to see if you should buy shares.
Putting 2022 in the rearview mirror
Before last year, it looked like Carvana could do no wrong. The innovative e-commerce auto retailer was growing like wildfire. From 2016 through 2021, the company's retail units sold and revenue skyrocketed 2,162% and 3,411%, respectively. Those are jaw-dropping figures. And during that five-year stretch, the stock catapulted nearly 2,000%.
In 2022, it was a different story. High inflation and rising interest rates made used cars less affordable, and used car prices ended the year lower than where they started. It was a perfect storm of adverse external factors that resulted in Carvana's revenue in the latest quarter (fourth-quarter 2022 ended Dec. 31, 2022) declining 24% year over year, with retail units sold falling 23%.
Adding fuel to the fire was the company's $2.2 billion purchase of car auction business ADESA in May last year. The strategic rationale made sense -- this acquisition would expand Carvana's delivery footprint and increase the number of vehicles the business could recondition. However, it further indebted the company. As of Dec. 31, Carvana had $6.8 billion in long-term debt on its balance sheet, compared to cash and cash equivalents of $434 million.
Of the $193 million in gross profit that Carvana generated in the latest quarter, $153 million, or 79% of it, went to interest expenses. That is definitely not a sign of a financially sound business, especially in a difficult macro environment like the one the U.S. is facing.
And during the quarter, Carvana took an $847 million goodwill impairment charge to write down the value of ADESA on its books, a clear admission that it overpaid for the acquisition. This led to a net loss of more than $1.4 billion in the three-month period.
Nonetheless, the management team is displaying their optimism. "Over the next six months, we will work to complete an estimated $1 billion in annual cost reduction, and we will do it while not only maintaining, but actually improving our customer experiences," CEO Ernie Garcia III wrote in the earnings press release. I guess we will see.
The stock might be tempting
As of this writing, Carvana's stock trades at a ridiculously low price-to-sales multiple of 0.05. This is about as cheap as shares have ever sold for, and it highlights how much pessimism is surrounding the business right now. If there's one thing that investors hate, it's heightened uncertainty. And there is perhaps no other company out there with more uncertainty than Carvana. As a result, the stock has been under some serious pressure.
This might tempt risk-seeking investors to consider adding the stock to their portfolios. For what it's worth, Carvana is solving the entire car-buying process, which has its drawbacks and is one of the worst experiences for people to have. The growth prior to last year can't be understated. And just the massive market size, at roughly $1.2 trillion domestically, presents a tremendous opportunity to penetrate.
Of course, investors would need to weigh these positive attributes against the company's unfavorable financial situation. If you believe Carvana can thread the needle this year and come out stronger once the economy bounces back, inflation gets under control, and interest rates have peaked, then it might be worth starting a tiny position in the stock. On the other hand, if you believe this is simply too risky a business to touch with your hard-earned capital, then it's best to pass on the stock, no matter how great the potential upside.
