What happened
Shares of Carvana (CVNA 2.88%) pulled back again in April after the volatile online used car dealer continued to negotiate with its bondholders, and the economy showed signs of risk from the banking crisis and rising interest rates.
According to data from S&P Global Market Intelligence, the stock finished the month down 29%. As the chart below shows, much of those losses came in the last week of the month, even though there was no company-specific news out on Carvana then.
So what
Carvana shares collapsed last year as investors worried the company could go bankrupt as interest rates spiked and car prices fell, creating a toxic stew for the used car dealer, which was already deep in debt and unprofitable.
Since then, the stock has been highly volatile, and management has scrambled to cut costs, issuing several rounds of layoffs and slashing inventory.
Coming into April against that backdrop, investors were spooked by a story in Bloomberg, showing that bondholders could be better off with a quick bankruptcy filing than waiting to see if Carvana can turn the business around, according to one Bloomberg analyst.
The report comes after Carvana offered to exchange as much as $1 billion in unsecured bonds at discounted prices, though bondholders rejected that offer.
The stock got a brief reprieve when CarMax posted better-than-expected results in the second week of April, but Carvana stock resumed its decline after that.
Over the second half of the month, there was little news out on the company, but investors seemed to react to further troubles in the banking system as First Republic Bank spiraled toward insolvencies, and the market fretted over the ongoing banking crisis. The crisis could sink the economy in a recession, adding to Carvana's problems as that would likely weigh on used car demand and push used car prices further down.
Now what
Carvana investors did get some good news in the first week of May as the used car dealer reported solid first-quarter results, showing progress in its cost-cutting initiatives. Revenue in the quarter fell 25% to $2.61 billion as it slashed inventory, but Carvana still managed to grow gross profit and posted an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of -0.9%, a significant improvement from -10% in the quarter a year ago.
Management also said it was targeting an adjusted EBITDA profit in Q2, which should allay concerns about a bankruptcy. Carvana still has a long way to go to reach financial health, but the Q1 report shows the company is on the right track.
