What happened
Shares of Carvana (CVNA -1.77%) were falling again this week, according to data from S&P Global Market Intelligence. The online used car marketplace is feeling the effects of the recent worker strikes at automotive plants around the country, which could limit how much supply is on the market. The stock is also likely pulling back due to its crazy bull run during the summer. At one point, Carvana shares were up over 1,000% year to date (YTD).
So what
In September, the United Auto Workers (UAW) decided to strike at major plants around the country. This could halt vehicle production in the United States for a considerable time period, limiting the supply of cars on lots. While it is unclear how much of this could trickle down to a used car retailer such as Carvana, investors are feeling bearish after these disruptions hit the auto market.
Last year, Carvana faced a similar dilemma as used car prices soared due to deteriorating supply across the country. Carvana saw its unit sales decline for the first time in its history in 2022. There may be fears that the same thing will happen in the coming quarters if the supply of cars gets severely limited once again. If there are fewer people buying and selling cars around the country, Carvana will have fewer buyers and sellers on its website, which is how it makes money.
Further, investors are likely bearish after the Federal Reserve indicated it would keep interest rates higher for longer at its September meetings. Higher interest rates make it tougher for people to purchase used cars and can dampen demand. Again, dampening demand would be bad for Carvana as it tries to grow and eventually generate a profit. It will also hurt the company as it eventually will be refinancing the large amount of loans on its balance sheet.
Now what
Excluding last year, Carvana has grown at a tremendous rate over the previous decade. However, it has failed to ever generate positive free cash flow. At one point last year, it had burned over $3 billion in cash over the previous 12 months. After the company implemed severe cost cuts this year, this cash burn has fallen to just $595 million over the last 12 months. That is still negative cash flow, though, and comes after slashing its research and marketing budgets.
It seems as though Carvana will struggle to ever generate a profit. With the company's highly leveraged balance sheet and potential macroeconomic headwinds, it is best for investors to avoid buying Carvana stock right now.