Is Carvana Going Out Of Business? The Stunning Financial Unraveling
In Shorts:
- A perfect storm of rising loan rates, inflation, and a possible recession is severely impacting Carvana’s auto sales.
- The company’s cash reserves are being severely squeezed by excess debt and ongoing large losses.
- In less than a year, bankruptcy may occur if operating trends do not quickly improve.
- It’s still feasible, but not assured just yet. Carvana can raise funds in a few different ways.
- Headwinds in the used automobile market, however, make a profit return difficult.
Over the last 12 months, Carvana’s fortunes have taken a sharp turn. The company is well-known for its online used car store and its auto vending machines. Carvana, once the envy of Wall Street and the US’s fastest-growing used-car dealer, is now in the midst of serious financial problems, leaving many to fear that the company may soon declare bankruptcy.
For months, Carvana has been facing an increasing number of red flags. From its all-time high in 2021, its stock has fallen an incredible 98%, with a 50% collapse in early November 2022 being the worst day of the year. Additionally, investors have priced in substantial default risks, causing bond rates to rise above 30%. Furthermore, in the most recent quarterly financial report, Carvana’s auditors expressed “substantial doubt” about the company’s capacity to remain a “going concern,” which is even more concerning. What caused Carvana’s unexpected turn of events, with losses increasing, debts accruing, and revenues falling? And will the bankruptcy court actually hear the case?
The Ascent of Carvana
The 2012 founding principle of Carvana was a simple yet revolutionary idea: consumers could purchase pre-owned vehicles entirely online without ever visiting a dealership. Its convenience and no-haggle pricing policy led to its exponential growth. Customers could peruse Carvana’s inventory online, apply for financing, buy a vehicle, and then either have it delivered to their door or pick it up at one of Carvana’s iconic vending machine locations.
Customers loved the digital, tailored experience of purchasing a vehicle. In 2017, Carvana decided to go public. Since then, the company price has skyrocketed. At its all-time high in August 2021, the stock price was $376, valuing the firm at more than $60 billion. So that you know, that’s more than what Ford and GM are currently valued at. Ernest Garcia III, founder and CEO of Carvana, was named Entrepreneur of the Year in 2020 by Ernst & Young.
Collapse Prematurely Planned
But Carvana was secretly planting the seeds for its demise even as its stock was soaring to new heights. The company’s rapid expansion was financed by taking on enormous amounts of debt, such as a $2.2 billion junk bond sale in 2020. The total debt on its books reached over $7 billion by year’s end 2021.
In addition, Carvana spent a lot of money on acquisitions to grow its company. The most notable acquisition was the acquisition of Adesa U.S.’s used vehicle auction business from KAR Global in April 2022 for $2.2 billion, paid for entirely in cash.
It is always dangerous to take on huge sums of debt to finance acquisitions, even though they can help grow a company. When fundamental economic conditions begin to worsen, that risk becomes much more accentuated. It was in 2022 that Carvana’s decline was most rapid and severe.
Dealing with Economic Challenges
Automobile manufacturers have felt the effects of rising interest rates, soaring prices, and recessionary fears this year. The rising cost of borrowing money has put a lot of people off buying cars, both new and old. Parts shortages and interruptions in the supply chain have further reduced inventories, particularly of the lower-priced automobiles that make up the bulk of Carvana’s sales.
After two years of skyrocketing growth propelled by stimulus payouts and surplus pandemic savings, Carvana has saw demand plummet. In Q3 2022, the business had a sequential drop in retail units sold for the second consecutive quarter. Year-over-year sales of used vehicles fell 14% in October, and the industry as a whole is expected to see a 10% decline in 2022.
Carvana made issues worse by taking on too much in 2021, when business was booming, under the mistaken impression that this success would last forever. That caused the business to have an excess of inventory as we entered the recession this year. There is now a huge disparity between the supply and demand for Carvana vehicles due to the company’s sales slump.
Accumulating Debits and Expenditure
Carvana has lowered prices in an effort to sell off unsold inventory as demand is quickly dwindling. It is still having trouble selling automobiles quickly enough. As a result, the company is selling fewer automobiles each quarter and getting less money for them.
Profitability for Carvana this year has been wiped out by that poisonous combo. Carvana posted a net loss of $283 million in Q1 2022, following a little profit in 2021. That deficit grew to more than $500 million in only one quarter. After reaching $4,500 per unit a year ago, total gross profit per unit dropped below $3,000 in Q2 due to inventory write-downs and lower sales prices.
Carvana is vulnerable to increasing interest rates due to its huge debt load, which is a worrying development. This year, total interest expenses have increased by more than 70%. Disaster strikes when falling revenues and profitability are coupled with excessive fixed borrowing costs.
Carvana ran out of money at an alarming rate, putting it in danger of defaulting on its loan obligations. In just the second quarter, the corporation spent approximately $750 million. At the end of September, its cash reserves were just $316 million, with an additional $3.3 billion accessible through revolving credit lines. But with its present rate of burn, Carvana would have less than a year’s worth of cash on hand before its creditors could declare bankruptcy.
Are You Sure to Go Bankrupt?
Time may be running out for Carvana to use the remaining levers to avert Chapter 11. Before worse losses further deplete the cash pile, the corporation can try to refinance or restructure part of its debt. Possible measures to reduce the pace of cash burn include layoffs and cost savings. Adesa U.S. used automobile auction unit is one division that could be sold to generate much-needed funds soon. Earlier in November, there were whispers that Carvana was attempting to find a buyer like this for Adesa.
Investor confidence may take a further hit if any asset transactions are interpreted as indications of the company’s ongoing difficulty. Carvana will have a tough time getting back on track financially as a result of the continued pressures from rising loan rates and the possibility of a recession in the used car industry. It now appears very unlikely that we will have the same rapid expansion as during the early stages of the epidemic.
Note: Carvana’s future is shaky, with hints of insolvency. In recent years, the corporation borrowed heavily to support rapid development. Carvana was badly vulnerable during the 2022 car industry crisis caused by inflation, increasing rates, and recession worries. Losses are in the hundreds of millions, and cash burn is serious. Carvana can obtain funds through asset sales, but rescue efforts have failed. Unless Carvana can stem its cash haemorrhage and become profitable soon, creditors may drive it into Chapter 11 bankruptcy due to its large debt. Carvana’s financial uncertainties encourage used car buyers to seek elsewhere where bankruptcy concerns aren’t clouding the buying process or long-term customer service reliability.
Should I Use Carvana?
Given Carvana’s financial woes and bankruptcy concerns, buyers should examine other used automobile options. While bankruptcy is still possible, Carvana’s high cash burn rate and operational losses indicate a struggling firm. So much uncertainty is bad for significant purchases like autos. Compare Carvana to other used vehicle shops before choosing if it’s still the best solution for your needs. Consider the increased risks compared to rivals with stronger finances. Carvana’s uncertain future warrants caution from customers until it can demonstrate a real comeback.
The Bottom Line
The fact that Carvana has so little time left before its creditors lose patience is the most problematic thing. Bankruptcy may become inevitable if financial reserves are continually exhausted and losses are accruing quarter after quarter. Nothing is clear just yet, but Carvana looks like it’s about to go off a cliff. Creditors are unwilling to keep floating the company’s enormous operating losses, so Chapter 11 may be likely unless it can arrange a stunning turnaround within the next 6-12 months. Carvana has been successful for a long time as a disruptive newcomer, but it is now confronted with the vicious economic reality that it cannot escape. Another one of its iconic auto vending machines may bring down bankruptcy for this beloved used car lot if it can’t weather the storm soon.
FAQs
What is the reason behind Carvana’s recent struggles?
Carvana was left exposed in 2022 when car sales dropped owing to rising interest rates, inflation, and worries of a recession because it had taken on substantial debt to finance its fast expansion.
What is the present financial status of Carvana?
Escalating losses, falling sales, surplus inventory, and rapid depletion of cash. Carvana spent all $750 million in cash during the last quarter, losing more than $500 million.
Is it possible for Carvana to raise capital by selling off some of its business?
It might try to unload some of its holdings, such as the Adesa U.S. used car auction business. However, asset sales could increase the likelihood of bankruptcy and frighten investors.
What will happen if Carvana is unable to reverse the situation swiftly?
Carvana could be compelled to file for Chapter 11 bankruptcy within 6-12 months if its losses and cash burn persist unchecked.
