What happened
Shares of used car company Carvana (CVNA 8.79%) fell as much as 17.5% in trading on Thursday as analysts downgraded the stock and investors wondered if shares rose too high too fast. At 3 p.m. ET, shares were down 14.8% on the day.
So what
Shares of Carvana jumped yesterday on better-than-expected second-quarter financial results. The most impressive number was $6,520 in gross profit per vehicle, which drove positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during the quarter. But Carvana did report a net loss of $105 million for the quarter.
A complex debt restructuring deal that reduces cash interest payment in the next two years in turn for more debt and issued equity will alleviate some pain but doesn't solve the company's long-term problems. That's one reason RBC downgraded the stock today, which is putting downward pressure on shares.
Now what
The reality is that Carvana's stock had probably run too far too fast. Shares are still up over 900% this year following the company's improving financial performance. And most of that increase was because the company didn't go bankrupt, like many observers thought.
But this doesn't mean Carvana's business is in good shape. In the second quarter, Carvana barely made enough gross profit to pay for selling, general, and administrative (SG&A) expenses. It didn't make enough to pay the $155 million interest bill. And in the third quarter, management expects units sold to be similar, SG&A costs to be similar, but gross profit to only be "above $5,000." It looks like losses will continue, and with that being the case this is a stock I'm staying out of today.
