Down 97% From Record Highs, Is Carvana Stock a Buy Right Now?

Author: Finscreener

Estimated read time: 3 minutes

Publication date: 18th Nov 2022 12:10 GMT+1

Founded in 2012, Carvana (NYSE: CVNA) is a used car e-commerce platform in the United States. CVNA stock price is currently down 87% from record highs valuing the company at $1.73 billion by market cap. Shares of Carvana were listed on NYSE in April 2017 at a price of $11.10. CVNA stock then touched an all-time high of $361 in August 2021 and is currently priced at $9.74 at the time of writing.

Let’s see if Carvana should be part of your equity portfolio right now.


Is CVNA stock a buy or a sell in Q4 of 2022?

Carvana increased its revenue from $1.95 billion in 2018 to $12.81 billion in 2021. But as is the case with most used car platforms, the profit margins for these companies are quite low. For example, Carvana reported a gross profit of $1.92 billion in 2021 compared to $196.7 million in 2018. Its gross margins stood at 15% last year, much higher than its margin of 10.3% in 2018. 

But due to high operating costs, the company remains unprofitable and reported an operating loss of $104 million in 2021. Further, due to supply chain disruptions, rising interest rates, and red-hot inflation, Carvana’s operating loss in the last four months has widened to $1.15 billion, driving its shares significantly lower in this period.

Carvana experienced explosive growth in 2021. It took the company five years to sell 100,000 cars in total, and it surpassed this number in 2019. Further, it sold 100,000 vehicles each quarter in 2021, more than doubling sales every quarter.

However, in Q3 of 2022, its retail units were down 8%, and sales fell by 3%. Its gross profit also declined by 31% year over year. In the last three quarters, its net loss stood at $1.45 billion, compared to a loss of $105 million in the year-ago period.

Carvana ended Q3 with $316 million in cash, indicating it will have to raise capital to support its high cash burn rates. This will either result in shareholder dilution or rising interest costs for a company already wrestling with massive losses.

In fact, Carvana ended the September quarter with a debt balance of more than $5.6 billion. Right now, Carvana is impacted by economic headwinds and a slowdown in auto sales soon after it reported stellar growth in the year-ago period. But investors remain concerned as the company is finding it quite difficult to fund its operations due to a high-cost base and expanding losses.


What next for Carvana stock price and investors?

Warren Buffett, one of the world’s most prolific equity investors, famously stated, “You don't find out who's been swimming naked until the tide goes out.

Carvana enjoyed a period of exponential growth when interest rates were significantly lower, and demand for cars was robust in mid-2020. While the company still struggled to report a profit, its growth story continued to drive share prices toward all-time highs.

Now the tide has gone out, and interest rates have gained significant momentum as the Federal Reserve aims to combat inflation.

Carvana borrowed over $3 billion at an interest rate of 10.25% to fund the $2.2 billion acquisition of a wholesale vehicle auction company and for site improvement expenses.

In Q3 of 2022, Caravan reported a gross profit of $359 million on revenue of $3.4 billion. Its gross margins slumped to 10.6%, and interest expenses surged over 200% to $153 million due to the above-mentioned loan.

With no profitability in sight, there is a good chance that Carvana will continue to underperform the broader markets in the next 12 months.

Disclaimer: The writer is an experienced financial consultant who writes for The observations he makes are his own and are not intended as investment or trading advice.