Carvana’s revenue rose 101% in 2019, grew 42% in 2020, even as the COVID-19 pandemic disrupted traditional dealerships, and soared 129% in 2021.
However, in the first nine months of 2022, Carvana’s revenue only grew 19% year-over-year to $10.8 billion, as the market demand for used vehicles cooled off. Despite this slowdown in growth, Carvana’s revenues have generally been on an upward trajectory in recent years.
Yet the company’s share price has fallen precipitously. Carvana’s share price reached an all-time high of $370.10 on August 10, 2021. But, by the end of 2022, the company’s share price had fallen significantly, dropping below $5 a share.
The decline in Carvana’s share price can be attributed to a combination of factors including falling used car prices, a surplus in vehicle supply, reduced consumer spending on big-ticket items like cars due to inflation, and rising interest rates which made it difficult for the company to sustain its growth.
In addition, Carvana’s lack of profits, high debt, and diminishing liquidity made it a risky investment, contributing to the decline in the company’s share price.
The company faces a number of obstacles to growing its business, including:
- Competition: Carvana faces competition from both traditional brick-and-mortar dealerships as well as other online car sellers. To differentiate itself and attract customers, the company needs to offer unique features such as its online financing platform and the ability to purchase vehicles without interacting with a salesperson.
- Economic headwinds: Falling used car prices, a surplus in vehicle supply, reduced consumer spending due to inflation, and rising interest rates all impact Carvana’s business. These economic conditions make it difficult for the company to sustain growth.
- Financial challenges: Carvana’s financial struggles, including slowing revenue growth, declining margins, and increasing losses, are also barriers to growth. The company’s high debt and limited liquidity may make it difficult to secure the financing it needs to expand its business.
Expanding on the competitive threats, they stem from:
- Vroom: An online car dealership that offers a wide selection of used and certified pre-owned vehicles for sale.
- AutoNation: A large dealership group that sells new and used vehicles both online and at physical locations across the United States.
- CarMax: A used car dealership that has a large inventory of vehicles available for purchase both online and at physical locations.
- CarSoup: An online marketplace for buying and selling new and used cars.
- TrueCar: A car-buying platform that provides consumers with pricing information and connects them with local dealerships.
The biggest challenge the company faces now is its debt burden. As of the end of the third quarter of 2022, Carvana had $9.25 billion in total liabilities, including $6.62 billion in long-term debt.
This debt is divided into five tranches maturing in 2025 ($500 million), 2027 ($600 million), 2028 ($600 million), 2029 ($750 million), and 2030 ($3.28 billion). The 2030 tranche was issued to fund the company’s $2.2 billion acquisition of the online used car auction website Adesa U.S. in May 2022.
Carvana’s debt and financial struggles, including its lack of profits and limited liquidity, have raised concerns about its ability to avoid bankruptcy.
At this time, there is no strong justification for investing in Carvana. We arrive at a fair value for the company just 1% higher than where shares currently sit today, suggesting it’s best to watch from the sidelines.