Carvana (CVNA 1.34%) was often called the "Amazon of used cars" when it went public nearly six years ago. It aimed to disrupt traditional dealerships with a streamlined online marketplace that set firm prices and simplified the financing process to "get the car without the car salesman." It also gained a lot of attention with its car vending towers, which took up less space than parking lots and enabled its customers to pick up their own vehicles.
Carvana's stock skyrocketed to an all-time high of $370.10 on Aug. 10, 2021. A $1,000 investment in its IPO at $15 would have blossomed to nearly $25,000. But it would have subsequently withered to about $500 as its stock dropped to around $8. So what happened?
Image source: Carvana.
The bulls initially flocked to Carvana during the growth stock rally of 2021 as used car sales skyrocketed in a post-pandemic market. But in 2022, used car prices plunged as the vehicle shortage turned into a surplus. Soaring inflation curbed consumer spending on cars, and rising interest rates made auto loans less appealing.
Those headwinds attracted the bears, who focused on Carvana's slowing revenue growth, lack of profits, and high debt. The bears have clearly been winning over the past year, but could Carvana's stock bottom out and recover this year?
What the bears will tell you about Carvana
The bears believe Carvana's business will collapse before the macro headwinds subside. Its revenue rose 6% to $13.6 billion in 2022, decelerating from its 129% growth in 2021, and its net loss widened from $287 million to $2.9 billion.
Carvana expects its revenue to decline 26%-31% year over year to $2.4-$2.6 billion in the first quarter, while analysts anticipate a 15% decline to $11.6 billion for the full year.
It also held $6.8 billion in long-term debt at the end of 2022, which dwarfed its $434 million in cash and equivalents, and it paid $486 million in interest on all that debt during the year. Nearly half of its long-term debt came from $3.3 billion in bonds (maturing in 2030) that it issued to fund its acquisition of the online used car auction website ADESA last May.
As of this writing, those 2030 bonds trade at $0.43 on the dollar, which suggests its creditors are giving it a 43% chance of surviving for another seven years. The next $500 million tranche of its notes, which mature in 2025, are trading at $0.66.
That precarious situation drove Carvana's three top creditors, which collectively hold about 70% of its debt, to band together last December to force the company to explore new ways to strengthen its balance sheet. However, it could still struggle if inflation stays hot and interest rates keep rising. It also faces intense competition from similar platforms like Carmax and Cars.com.
What the bulls will tell you about Carvana
The bulls believe Carvana will survive the near-term macro challenges. It already laid off 2,000 employees, or a fifth of its workforce, in 2022, and it expects to trim even more jobs this year as it reins in its advertising expenses.
As a result, it expects to narrow its net loss from $348 million in the first quarter of 2022 to just $50-$100 million in the first quarter of 2023. For the full year, analysts expect it to more than halve its net loss to $1.4 billion.
As for its bleeding balance sheet, Carvana recently proposed to restructure some of its debt by offering its creditors an option to exchange their unsecured notes at a premium to the current market prices in exchange for new secured notes. If fully subscribed, that exchange would reduce the face value of Carvana's $5.7 billion in unsecured bond debt by $1.3 billion, while reducing its annual interest payments by about $100 million.
If Carvana pulls off that exchange, its chances of remaining solvent until the macro headwinds subside will increase dramatically. With an enterprise value of $8.8 billion, Carvana would also seem incredibly cheap at 0.8 times this year's sales. It also seems ripe for a short squeeze with a whopping 44% of its shares being shorted as of March 14.
That might be why Carvana's insiders bought 10.3 million shares over the past 12 months while only selling about 42,000 shares. The insider buyers are also outnumbering the sellers at Carmax and Cars.com, which suggests the entire used car dealership cohort is undervalued and due for a recovery. All of these facts suggest that after feasting on Carvana and its automotive peers over the past year, the bears have gotten too fat and greedy.
A good turnaround play for speculative investors
Carvana is still a highly speculative play, but it makes more sense to be bullish than bearish right now. The bear case against Carvana is still strong, but it's running out of steam and arguably turning it into a deeply undervalued stock. Investors who can stomach the near-term volatility should consider picking up a few shares right now.
