Following a brutal stretch of trading last year, shares of Carvana (CVNA 2.04%) rebounded early in 2023 and are up roughly 76% year to date. Despite some strong positive price momentum for the online used-car dealer's lately, the company's share price is still down roughly 98% from its peak.
Is Carvana's comeback still just warming up, or is it bound to run out of gas? Read on to see bullish and bearish cases presented by two Motley Fool contributors.
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The bear case: Carvana has metrics heading the wrong way and big debt
Keith Noonan: Carvana's stock surge early in 2023 has been exciting, but its business is anything but. Total unit sales declined 23% year over year to 86,977 in the fourth quarter, and revenue dipped approximately 24% to come in at roughly $2.84 billion.
While the company still managed to grow annual revenue by roughly 6% to reach $13.6 billion earlier in the year, its gross margin fell from 15.1% in 2021 to 9.2%, and sales trends soured. It seems that the business could be in for an even tougher go of it in 2023. With a potential economic downturn in 2023 and a series of business-specific pressures, Carvana's financial position looks fraught.
With long-term debt of roughly $6.54 billion against cash, equivalents, and restricted cash totaling just $628 million at the end of last quarter, the company faces liquidity questions that could be tough to answer. To add a bit more context, it currently has a market capitalization of roughly $1.46 billion, and it posted a net loss of $806 million last quarter and roughly $1.59 billion last year.
Carvana is burning cash, sales could be stuck in reverse for the foreseeable future, and it has debt repayments coming due in the next two years. The company will likely either need to take on more debt and restructure, or return to the well with new rounds of substantially dilutive share offerings. Another potential outcome is bankruptcy.
The bull case: Carvana stock is risky but has a massive upside potential
Parkev Tatevosian: Admittedly, Carvana has plenty of challenges to overcome in the near term. The company thrived at the onset of the pandemic when new-car production was constrained by supply chain disruption. That was great news for a used car business, and sales increased from $5.6 billion to $12.8 billion between 2020 and 2021.
Unfortunately, Carvana buys and sells used cars, and as the prices of vehicles increased, it paid more for inventory. Now that new-car production has increased, and consumer demand for cars overall has decreased, Carvana is stuck with more inventory than it would like.
That said, its challenges are likely already more than priced into the stock. Shares are down 98% off their highs in 2021. But management recognized the changing car-buying environment and made aggressive moves to adjust costs, inventory, and spending accordingly.
The company offers car buyers and sellers an improved experience over legacy dealerships with transparent pricing, e-commerce options, and better service. That could mean excellent upside in the long run if it can effectively deal with its current challenges. For investors, that means potential for superior returns to compensate for the elevated risk in buying Carvana stock.
Is now the time to buy Carvana stock?
Carvana faces a tough sales outlook, pressured gross margins, and liquidity issues. The company can cut operating costs to reduce overall net losses, but it has a difficult path to profitability, and there are pressing debt issues that will have to be overcome in the near term. Accordingly, the stock probably isn't a good fit unless you're on the hunt for speculative rebound plays.
On the other hand, the market doesn't seem to be pricing in much chance that Carvana can post a sustained recovery even after big gains for the stock this year, and even moderate progress for the business could power big returns for the company's share price. For risk-tolerant investors willing to bet that business will improve or that the market will be willing to assign higher valuation multiples to the company, shares might be worth buying.
