Wall Street loves a good story, Calvana (CVNA 19.54%) There was one with a luxury used car “vending machine” and an online business model.
However, investors are known to be fickle and often move on to new ones when old ones get bored. Considering that Carvana’s stock price has fallen 95% of his over the past year, it’s clear that Mr. Market’s craze is over. Is this an opportunity for a bargain, or a warning sign that Carvana’s future is in jeopardy?
Interesting, but is it sustainable?
Carvana is trying to transform the used car market, which is highly fragmented and, with a few exceptions, has not kept up with the times. of course, Carmax (KMX 4.29%) New car dealers who also sell used cars have a significant presence online, but keep an eye out for smaller car dealerships near you. There seems to be a big difference. New-car dealers, on the other hand, prefer to buy new cars over used ones, so the investment incentives in the used-car sector are not the same as for CarMax, which is itself primarily a brick-and-mortar store.
Image Source: Getty Images.
That means there’s room for companies like Carvana to build an online-centric used car business. Add in the company’s theatrically compelling “vending machines,” and it’s no wonder investors liked the company’s story early on.
This story gained even more momentum in the early days of the coronavirus pandemic in 2020-2021. As customers practiced social distancing to slow the spread of the disease, going online was the easiest option. Like many other online-centric retailers, Carvana’s stock price rose even though it had yet to turn a profit for the full year.
That’s actually not uncommon for a young company looking to build a business, but as 2021 progresses, it becomes clear that Carvana is nowhere near sustainable profitability. and it continued as 2022 results seemed to solidify a new negative narrative about the company.
risk vs reward
Here’s what’s interesting about this story for Contrarian types. In hindsight, when Carvana’s stock was trading at over $300, it was a very risky investment. With the stock currently trading at around $6.50, more aggressive investors may wonder if Carvana’s business model is worth buying. The answer is probably not.
In the first nine months of 2022, sales increased nearly 19% year-over-year. This is a big number. However, the company’s income statement line items cost of goods sold he rose 27%. Ultimately, gross margins were down 25%. And add in operating expenses (selling, general and administrative expenses) up nearly 50% year-over-year and interest expense up 175%, and you basically have a pre-tax loss. exploded.
This is no exaggeration. In his first nine months of 2021, Carvana’s pre-tax loss was $105 million. Over the same span in 2022, the company lost his $1.45 billion. Normally such changes would involve some temporary amortization, but this was not the case.
Carvana is trying to cut costs, but investors seem concerned that management is focused on growing sales without considering profits. Given the numbers here, it’s hard to argue that this isn’t the case, and perhaps even harder to suggest that Carvana has proven it has a sustainable business model. Given the still challenging economic environment, with both high inflation and rising interest rates, it’s hard to believe that the fourth quarter of 2022 will be much better than the rest of the year.
a lot to prove
Carvana has an interesting business model, but the results so far haven’t been great, at least if you’re interested in owning a profitable business. Management appears to be shifting gears, but it’s not clear if they can turn this underfunded business into a profitable business. Until then, most investors should view a sharp decline in stock prices as a warning sign that the current risks outweigh the potential gains.
