Carvana Stock: Too Risky To Invest (NYSE:CVNA)

Investment Thesis

Used car retailer Carvana (NYSE:CVNA) conducts all of its business online and through a network of automated car vending machines. The business was established in 2012, and in 2017 it became public. Carvana’s stock price has experienced huge price increases and even more significant price drops since its initial public offering.

During the pandemic, the company’s stock price surged reaching an all-time high of more than $360. Since then, mainly due to unprofitability and bankruptcy concerns, the stock has lost nearly 98% of its value. It is now clear that investing in the company when it was trading close to all-time highs was not a wise decision, but can the company bring decent returns to its shareholders at least from this point?

Financial Performance

Carvana’s revenue has increased dramatically after going public, from $365 million in 2017 to $14.52 billion in the TTM. This expansion has been fueled by increases in both the quantity and average price of vehicles sold. The company sold more than 330,000 automobiles in the first three quarters of 2022, which represents a gain of more than 4.2% from the same period last year. But when assessing Carvana, some investors might be overlooking the company’s difficulties with profitability.

Since going public in 2017, Carvana has had trouble making a profit. Since its initial public offering, the company has posted net losses every year as the burden of high operating costs has hurt its bottom line. Although the company has seen a huge increase in revenue, profitability has not yet followed.

Because they are concentrating on the company’s impressive revenue growth or because they think that the company’s profitability will increase in the future, investors may be neglecting this profitability issue. However, while assessing the company’s long-term prospects, investors must take into account both the company’s profitability and its revenue growth.

More specifically, the business recorded a net loss of $870 million for the TTM of 2022, down (in terms of profitability) from a net loss of $135 million for the TTM of 2021. This loss was primarily due to the company’s high operating expenses, which have included significant investments in marketing and technology.

Future Of The Company

The rising popularity of online automobile shopping has been one of the key factors in Carvana’s expansion. The COVID-19 pandemic has accelerated this trend, as consumers have been more hesitant to visit physical car dealerships due to health concerns. Carvana’s fully online model has allowed the company to capitalize on this shift in consumer behavior. If this trend continues, it could be a tailwind for the company and help it to continue growing. However, the company will need to navigate intense competition from both traditional car dealerships and other online retailers, such as Vroom (VRM) and CarGurus (CARG), in order to continue growing.

Investments

Carvana has made significant investments in its network of automated automobile vending machines in addition to its online platform. These vending machines, which can be found in many American cities, offer clients a distinctive and practical option to pick up their vehicles. The business has also made investments in its distribution infrastructure, enabling it to reach customers outside of vending machine locations.

In addition to its delivery infrastructure, Carvana has also made significant investments in technology and automation. The company has developed a proprietary platform that allows customers to shop for, finance, and purchase vehicles entirely online, and it has also invested in automation in its fulfillment centers to improve efficiency and reduce costs.

Finally, it’s critical to take into account the overall economic climate. Economic downturns have a significant impact on the used automobile market because consumers may be less inclined to buy a car if they are facing financial difficulties. The sales and profitability of Carvana could suffer from a recession or other economic slump.

Overall, Carvana’s investments in delivery, technology, and automation have played a key role in the company’s growth and have allowed it to differentiate itself from traditional car dealerships and other online retailers but its future remains unpredictable and will be influenced by a number of variables that may have an effect on the company’s financial performance and competitive position.

Risks and Challenges

Carvana has experienced rapid expansion, but it also confronts a number of threats and obstacles that could hinder its future success. The fierce rivalry in the used car market is one of the key risks. As previously indicated, Carvana has competition from both conventional auto dealers and other internet merchants like Vroom and CarGurus Technologies. The business will need to set itself apart from these rivals and persuade customers to use its platform if it wants to keep expanding.

Bankruptcy Risk

As indicated before, Carvana has had trouble making money, reporting a net loss every year since going public in 2017. Despite the company’s strong revenue growth, its high operating costs have hurt its bottom line. The business may experience financial difficulty if it is unable to increase its profitability and produce positive cash flow.

The debt load of the business should also be taken into account. Carvana has less than $670 million in cash and short-term investments as of 2022 but has $6.247 billion in long-term debt that it has used to support its growth and expansion. If the company is unable to continue growing at a rapid pace and generate sufficient cash flow to service this debt, and with this current ratio of 2.38, it could be at risk of bankruptcy.

Conclusion

Overall, Carvana has experienced strong growth in recent years, thanks to the increasing popularity of online car shopping and the company’s unique business model. However, the company faces significant competition in the used car market and a high level of debt on its balance sheet, which only gets worse making the scenario of bankruptcy more and more probable, in my view. Personally, although I understand that Carvana might have great upside potential, I would avoid owning a company that has a high risk of going out of business in the next few years, has never profited a penny, and is projected to keep burning cash at least until 2026. This is why I rate Carvana as a SELL.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.