It's only July, but it seems fair to call Carvana (CVNA 8.79%) the comeback stock of the year.
Shares of the online used car dealer, which seemed to be heading toward bankruptcy at the beginning of 2023, are now up 980% year to date after the company solidified its recovery with news of a debt restructuring, a new equity offering, and a better-than-expected second-quarter earnings report. Altogether, the stock jumped as much as 43% on Wednesday.
There's a lot to unpack here, so let's go over the details:
- Carvana is eliminating more than 83% of its unsecured notes due in 2025 and 2027.
- The agreement will reduce required cash-interest expense by more than $430 million each year for the next two years and will lower the company's outstanding debt by $1.2 billion.
- The debt exchange comes with the support of debtholders representing more than 90% of the company's senior unsecured notes.
- In the debt exchange, Carvana is issuing $4.376 billion in new, higher-interest debt with later maturities. The earliest maturity of the new notes is December 2028, and the debt is secured by its assets, unlike the earlier unsecured debt.
- The company also announced an at-the-market offering of $1 billion with the option to increase it.
Image source: Carvana.
Room to breathe
CFO Mark Jenkins said, "This transaction significantly increases our financial flexibility by reducing our total debt, extending maturities, and lowering near-term cash interest expense." The deal essentially gives Carvana more flexibility and room to rebuild its business.
Debtholders like Apollo Global Management benefit from a higher interest rate as the notes that are being retired had interest rates between 4.875% to 5.875%. The new debt carries a cash-interest rate of 9% to 11%, and it's structured so that Carvana can pay interest with new debt, known as payment-in-kind, for the first two years, giving it significant breathing room as the company is still in the process of turning around the business and generating sustainable positive cash flow.
Record profits
Separately, the company released a stronger-than-expected earnings report with record adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), and record gross profit per unit (GPU).
Revenue fell 24% to $2.97 billion, easily beating the consensus of $2.59 billion as the company has scaled back on inventory in order to bring its costs into line. Inventory was down 55% year over year and 12% from Q1. Gross profit per unit reached $6,520 on a generally accepted accounting principles (GAAP) basis, though the company estimates that $900 of that profit came from non-recurring benefits. Even so, that was significantly better than the $3,368 in GPU it reported in the quarter a year ago and $4,303 in Q1.
Adjusted EBITDA, meanwhile, jumped from a loss of $216 million in the quarter a year ago to a profit of $155 million. On a GAAP basis, it lost $58 million in the quarter but generated $393 million in free cash flow for the first half of the year thanks to vehicle loan-receivable sales that were higher than originations and a reduction in inventory.
Looking ahead, the company expects positive adjusted EBITDA in Q3, non-GAAP total GPU above $5,000, and a similar number of retail units sold compared to Q2.
Is Carvana stock a buy now?
The turnaround story with Carvana is by no means complete, and it's important to recognize that the benefit of the debt-restructuring deal is that it mostly buys the company time to strengthen its business and move toward sustainable profitability so it can pay down its debt. Management still needs to achieve sustainable profitability, something it has never done before.
The stock offering also shows how the company has increased financial flexibility now that shares have rebounded from their depths early last year. At a market capitalization of $9.3 billion, selling $1 billion in stock would only dilute shareholders by 11%, which is worth doing to further pay down its debt and add financial flexibility.
While the company has made huge strides in the first half of the year, the business is still on uncertain ground, and investors should expect the stock to remain volatile. Carvana has never been sustainably profitable. Investors had long overlooked that reality as the company grew like wildfire for much of its history, posting 23 straight quarters of triple-digit revenue growth.
However, the company is in a new stage now and must demonstrate that it can grow sustainably and profitably, but investors have to like the early results from the turnaround, which has happened much faster than Wall Street predicted.
The stock is no longer priced like a bankruptcy play, so investors shouldn't expect the kind of performance the stock delivered in the first half of the year, but the risk vs. reward still looks favorable for Carvana, especially as it's competing in an addressable market of roughly $1 trillion, and it's the clear leader in the e-commerce channel.
