We are short shares of Carvana Co. Please click here to read full disclosures.
We are short shares of Carvana Co. (CVNA), a $4bn market cap online platform for buying and selling used cars. Originally hyped up as an innovative disruptor, Carvana is now recognized to be just a poorly run auto retailer struggling under the challenges of a severe industry downturn and the unsustainable burden of $6.5bn in debt. While many have shared concerns over Carvana’s business before, we voice ours at a time when shares have risen 165% in only a month on misguided optimism for profits that amount to little more than buffing the paint job on a totaled car.
Over its history of burning billions of dollars of investor capital to manufacture topline growth, Carvana has never generated sustainable profits or free cash flow. Even during the pandemic, when Carvana was virtually the only online option for scores of desperate car buyers willing to pay any price, the company failed to turn an annual profit. As the prospect of bankruptcy loomed, last year management began slashing costs, shrinking its operations and finessing working capital to try to generate positive free cash flow, and still failed. The company is pursuing a last-ditch attempt to sell markets on a new narrative, but ultimately, the business can’t escape the following reality: 1) whether a small local dealer or a tech-driven online platform, flipping used cars is a tough, capital-intensive business with lousy margins and, 2) any company can grow quickly and take share if run irresponsibly on costs, especially if capital markets are willing to foot the bill. Rather than representing true disruptive change, Carvana is a flawed player, armed with tools no better than the competition it seeks to disrupt and led by a management team which lacks seasoned automotive, operational experience. Carvana didn’t make money even when cars sold themselves, interest rates were low and used car prices were skyrocketing. Today, none of that is true anymore, and the company has no hope but to eventually restructure its massive debt load.
Carvana’s fundamental fate was sealed last May. In an epic blunder, Carvana management misread the sustainability of pandemic-induced industry conditions and issued billions in high yield debt to finance the purchase of additional capacity, just as macro and industry conditions began choking demand. All these conditions persist today with few signs of improvement. Against this backdrop, Carvana pivoted abruptly from all-out growth to finally focusing on profitability, but it’s too little, too late. Carvana’s aggressive cost cuts may succeed in slowing the rate of cash burn, but with over $700m in annual interest expense and capex, it simply cannot generate enough profit to stop the negative cash flow.
As the year progresses, cash and liquidity will dwindle further, and Carvana will be staring at over $250m in interest payments in the 4th quarter alone, its seasonally slowest period. After repeated attempts to improve liquidity through a bond exchange failed, last week the company conveniently pre-announced “better than expected” 2Q EBITDA, not because of sustainable, fundamental improvement in its core business, but primarily due to large one-time loan sales – a move which reeks of pumping shares ahead of a potential equity offering.
Despite the stock’s fall from all-time highs, Carvana shares are worthless. Comparisons to tech/e-commerce platforms are nonsensical. Carvana should be valued like any other publicly traded auto retailer, and specifically one that is poorly capitalized and more cyclical due to a lack of diversification and subprime exposure. We view the equity as a zero and investing at current levels is a worse deal than buying a clunker from a slick used car salesman.
Read our full report here.
jv8jv@yahoo.com 10 months ago Reply
An excellent unbiased analysis. Very satisfying to read analysis compared to the garbage passed off as analysis by the institutional sell side stock pimps who abuse and debase the practice of objective analysis and the profession of equity analysts. Thank you for allowing free access to the research.
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