With shares up by a whopping 530% year to date, Carvana (CVNA 8.79%) stock seems to have risen from the dead. But while investors are more confident in the company's potential to overcome its near-term headwinds and regain a growth trajectory, debt and cash burn challenges remain. Let's explore what the next five years could hold for this embattled online used car dealership.
What happened to Carvana?
Founded in 2012 and going public through an initial public offering (IPO) in 2017, Carvana aims to revolutionize the used car industry by replacing dealerships with an e-commerce business model. The company's stock began to skyrocket amid the COVID-19 pandemic, which increased interest in stay-at-home-related companies. Shares peaked at a whopping $370 in mid 2021. But despite the substantial rally in 2023, the stock is still down around 92% from its all-time high.
The company has several key problems. Firstly, as pandemic-era trends normalized, investors lost interest in e-commerce stocks as a whole. The easing of new car production bottlenecks and rising rates also put a damper on the company's previously high growth rate, and exposed previously overlooked challenges with margins and profitability.
What does the present tell us about the future?
Carvana's third-quarter earnings were a mixed bag. While total revenue fell by 18% year over year to $2.77 billion, the number of used cars sold seems to have bottomed in the second quarter (with 76,530 units) and returned to growth in the third quarter (80,987 units). But it is unclear if this trend represents a sustainable change in Carvana's operational trajectory or just short-term seasonality that won't last.
If Carvana can return to sustainable top-line growth, it would coincide with impressive cost cutting. In the third quarter, management slashed selling, general, and administrative expenses by over 34% to $433 million. These efforts involved layoffs in 2022, along with reductions in advertising spending and other overhead. Carvana also reported a net income of $741 million. But while this looks great on the surface, it relied on a $878 million non-cash entry called "gain on debt extinguishment" related to a debt restructuring announced in July.
The deal allowed Carvana to slash its total debt outstanding by over $1.2 billion and defer its cash interest expense by over $430 million annually over the next two years in return for issuing new notes secured by company assets that come due at a later date.
Image source: Getty Images.
However, investors should remember the non-cash "gain" related to this transaction is a one-time thing. And the deal itself simply buys Carvana time instead of permanently solving its debt challenges. Over the long term, the total debt could increase as Carvana defers current maturities by issuing new debt.
The situation is dire. As of the end of the third quarter, the company reported $5.3 billion in long-term debt, which dwarfs the $544 million in cash and equivalents on its balance sheet.
Is Carvana stock a long-term buy?
Despite the challenges, Carvana's low valuation is a green flag. With a price-to-sales (P/S) multiple of just 0.44, the stock is significantly cheaper than the S&P 500 average of 2.42. But you get what you pay for. It is unclear if Carvana's revenue has bottomed. And despite some near-term fixes, the company's debt situation still looks out of control from a long-term perspective.
Over the next five years, Carvana could be an all-or-nothing bet. Either it regains a growth trajectory, consistent cash flow, and a normal valuation -- or sales continue to decline, and bankruptcy becomes a real possibility. I think investors need a few more quarters of data before being able to make an informed decision on where the stock is headed.
