Calvana (CVNA -9.72%) The 2022 bear market was especially hard hit, with stocks down 97% in just 12 months. Unfortunately for investors, 2023 looks likely to be another downside.
Let’s take a closer look at why investors should keep avoiding Calvana stocks this year amid deteriorating fundamentals and possible debt service issues.
1. Carvana’s business is stagnant
Carvana is an innovative used car dealership that disrupts the industry with an online-centric business model and flashy branding tactics such as auto vending machines. The company has been public since his 2017, but it caught the attention of Wall Street at the height of the COVID-19 pandemic, when lockdowns and travel restrictions sparked interest in home-based businesses.
Perhaps just as important, the US Federal Reserve has kept interest rates low to deal with economic turmoil. Low interest rates have made it easier for Carvana’s customers to obtain affordable credit. As a result, used cars now trade at a healthy premium. But now, Carvana’s bull thesis seems to be falling apart at the seams.
Sales in the third quarter were down 3% to $3.4 billion. This is on the back of an 8% drop in sales to $102,570. A deterioration in the top line has pushed net losses from $68 million to $508 million, despite management’s commitment to cutting costs and “leading the business to profitability.” surged to Carvana sells fewer cars and lower prices, a problem that’s hard to fix because it’s largely out of management control.
2. Challenging macroeconomic environment
Perhaps Carvana’s biggest challenge is overturning pandemic-era expansion policies, raising interest rates nowHigher interest rates mean higher credit throughout the economy, making it harder for Carvana customers to take out loans to buy used cars. JP Morgan These challenges are expected to bring used car prices down by 10% to 20% in 2023.
Carvana has yet to provide quantitative guidance for the new year. But investors should not expect too much.
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Seventy percent of economists surveyed by Bloomberg in December expect a recession within the next 12 months. A recession could spur his Fed to ease rate hikes, but it would also kill demand for Carvana’s business. Used cars are a big expense and people usually procrastinate when money is tight.
3. Calvana may struggle to handle debt
As of the third quarter, Carvana reported $6.6 billion in long-term debt, but only $316 million in cash and equivalents. The company posted a net loss of $508 million in this period, and many headwinds make it unlikely to turn profitable anytime soon. In addition, a rising interest rate environment will increase the coupon on existing bonds, making refinancing more expensive.
Calvana Creditors look at the letters on the wall It seems that I am worried about it. In December, the company’s largest debt holders signed a deal obliging them to cooperate in negotiations. The move suggests they may have concerns about Carvana’s ability to meet its obligations. Carvana may be able to pull itself out of this mess, but investors should stay away from the stock until the long-term picture becomes clearer.
JPMorgan Chase is an advertising partner for The Motley Fool’s Ascent. Will Ebiefung has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends JPMorgan Chase. The Motley Fool’s U.S. headquarters has a disclosure policy.
