On the surface, Carvana (CVNA -0.36%) looks like it had a spectacular turnaround year in 2023. Earnings rocketed from a $15.74 per share loss in 2022 to a profit of $4.12 per share. And it also seems like it got off to a big start in 2024, with a first-quarter profit of $0.24 per share. These are impressive results, but there's more to the story here than there appears to be.
Here are three things you need to keep a close eye on if you are considering an investment in this used car retailer.
1. Carvana had no choice if it wanted to survive
If you examine Carvana's fourth quarter 2023 earnings release, you'll notice this little side note:
Net income for FY 2023 totaled $150 million and benefited by $878 million gain on debt extinguishment as a result of our corporate debt exchange.
There's a lot to unpack in that little explainer.
Image source: Getty Images.
First off, if you pulled out that $878 million gain it would have pushed that $150 net income well into negative territory. So the company didn't do nearly as well as its financial statements might suggest. But what exactly happened? To sum it up, Carvana had so much debt that it was at a very real risk of not being able to pay its creditors. Instead of pushing the company into bankruptcy the bondholders gave Carvana a break and renegotiated the debt.
This is good news, for sure, given that there was a real risk of the company going under. But this is not a transaction that was undertaken from a position of strength; it was forced on Carvana. And, even after the debt deal, its debt-to-equity ratio ended the year at over 25 times, which is shockingly high. The company's leverage remains a big problem and you have to continue to monitor it.
2. Interest expenses continue to eat Carvana's lunch money
Although intimately tied to the leverage issue, one of the big reasons for the debt renegotiation was to lower its interest expenses. That's one place where the balance sheet and the income statement come together, if you will. Lower interest expenses are a good thing, for sure, but first quarter 2024 interest expense totaled $173 million, up from $159 million in the first quarter of 2023. Perhaps the interest expense is lower than it would have been without the debt renegotiation, but interest expense didn't actually go down on the company's GAAP financial statements.
But that's not the biggest worry here. Operating income, which doesn't include the impact of interest expenses, totaled $134 million. That means that interest expenses are still eating away all of the company's operating profits. That's not sustainable over the long term and investors need to keep an eye on what's going on with this important expense given the heavy debt load the company still carries.
3. Carvana didn't make money in 4Q 2023 and 1Q 2024 wasn't exactly a winner, either
The big debt exchange took place in the third quarter of 2023. Which makes the fourth quarter an interesting datapoint because it wasn't impacted by the one-time benefit of the debt renegotiation but the results of the debt deal would have been visible in the quarter's financial results.
CVNA EPS Basic (Quarterly) data by YCharts
The outcome? The company's bottom line was in the red to the tune of $1 per share in the fourth quarter of 2023. While that's a huge improvement over the fourth quarter 2022 loss of $7.61 per share, the company clearly remains a work in progress as it attempts to become sustainably profitable.
The first quarter of 2024 was just as complicated as the company's 2023 results. Management reported earnings of $0.23 per diluted share, on net income of roughly $49 million. But then it goes on to note that net income "... included a ~$75 million gain in the fair value of our warrants to acquire Root common stock." Take out that gain from the first quarter 2024 net income figure and Carvana would, again, be back in the loss column. So unless the company can come up with more one-time items in the future, it isn't clear that the company is really profitable at this point.
Carvana likes to highlight numbers like gross profit per vehicle, but that's not enough to really assess the long-term viability of the company. You need to monitor the bottom line, too. If Carvana can't turn a profit for shareholders, without unusual accounting one-offs, it probably isn't worth owning.
Carvana is not for risk-averse investors
All in, Carvana runs what should be a fairly simple business, selling used cars. But the company is anything but simple. Most investors will probably be better off avoiding it. That said, if you do take a look at the stock, you'll want to monitor the company's leverage, its still hefty interest costs, and its, perhaps overly complicated, bottom line.
