Is Carvana on a Collision Course?

From the day the company went public in 2017, used-car seller Carvana Co. (NYSE: CVNA) was one of the hottest stocks in the market.

A $10,000 investment in Carvana made in 2017 would have been worth $333,420 by August 10, 2021.

That’s what you call charging out of the gate!

It was a great ride. But the good times stopped then and there.

Since August 2021, this stock has been on a terrifying one-way trip straight down.

Carvana shares have now plunged 91% from their peak in 2021!

Ouch.

Anyone who chased this hot stock and its exciting story has likely been badly burned.

If you are contrarian by nature, you might be wondering whether this big share price decline represents a good investment opportunity.

The fundamentals will help us figure that out…

Like AutoNation Inc. (NYSE: AN) and CarMax Inc. (NYSE: KMX), Carvana sells used cars on a national scale.

This is an advantage over smaller regional dealers because Carvana can focus on buying used cars in regions where they are priced the lowest and then resell them at higher prices around the country.

What differentiates Carvana from competitors AutoNation and CarMax is that Carvana’s business is conducted entirely online.

Carvana is trying to digitalize the used-car industry in the same way Amazon has done to retail.

Buying a used car from Carvana is a quick and painless process.

The listed price is the price. There is no haggling and no dealing with high-pressure used-car salesmen.

Carvana will even ship the used car to your house – just like Amazon ships retail goods to your door!

That sounds great to me. And from a revenue standpoint, the business has been healthy.

Carvana grew revenue from $350 million in 2016 to $11.7 billion in 2021.

This kind of revenue growth is what got investors so excited about this stock.

The problem for Carvana is that – despite that revenue growth – it isn’t making any money.

More accurately, the company has never made any money. In every single year, Carvana has posted a loss.

Worse, the company is also burning through cash at a rapid clip.

Over the past three full years, Carvana has burned through $3.95 billion in cash.

In the first six months of this year alone, the company incinerated another $480 million.

I don’t like that.

To be fair, high-growth companies sometimes post losses and burn through cash in their early years as they focus on building market share.

But what kills me about Carvana is the company’s balance sheet.

Carvana carries $1 billion in cash, and, after issuing $3.3 billion worth of senior notes this spring, it’s now saddled with $7.6 billion in debt.

A company that doesn’t generate cash flow shouldn’t be carrying this much net debt.

With the rate Carvana has been burning through cash, this company could run out of money at some point in 2023.

That would mean Carvana would need to raise more cash by issuing either equity or additional debt.

With a depressed share price, an equity issuance would be painfully dilutive.

With the senior notes that Carvana just issued being completed at a nosebleed interest rate of 10.25%, we also know that the market already views the company as very risky.

Carvana may not be able to issue additional debt.

Currently, Carvana’s market valuation (enterprise value) is around $11 billion.

For that price, investors are getting a company that makes no money, burns through cash at a rapid pace and will face a cash crunch in the not-so-distant future.

Despite the big share price decline, the Value Meter rates Carvana as “Extremely Overvalued.”

Value investors should take a pass on this one and look elsewhere.

Valuation Rating: Extremely Overvalued

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Good investing,

Jody