Shares in Carvana Co (NYSE:CVNA) had another day to forget, plunging 13.6% as investors continued to steer clear of the online-only used car retailer.
The company, dubbed the "Amazon of used cars" was an investor darling during the pandemic as consumers bought everything online and used car prices soared as car manufacturers’ struggled to meet demand.
Low cost finance meant buying a car was easy and the company itself tapped the credit market five times during COVID.
READ: Carvana Co shares upgraded by several analysts after better-than-expected first-quarter sales
But all this has changed, confirmed in recent results, which sent the group’s shares down sharply. Indeed, the stock has fallen 95% so far in 2022.
The figures reflected the perfect storm now faced by the company. Interest rates have risen rapidly, supply chain problems remain, while 40-year high inflation threatens to push the economy into recession, making consumers more cautious.
CEO Eric Garcia admitted last week that Carvana had misread market developments.
"We failed to accurately predict how this would all play out and the impact it would have on our business” Garcia told employees in an internal memo in which he announced cuts of 1,500 jobs, or 8% of the company's workforce.
Management has faced severe criticism for some of its actions including spending too much money on marketing, which included a Superbowl ad.
A cavalier attitude to cash has left some to even question whether the business can even survive.
Carvana doesn’t have much cash on hand, and they have $6.3 billion in debt, including $5.7 billion in senior notes. The company has consistently borrowed money to cover losses.
Adam Jonas, an analyst from Morgan Stanley (NYSE:MS), pulled his $68 price target and said that the company may now be worth as little as $1 a share.
With used car prices falling the value of Carvana’s inventory is also dropping which, if it continues, will significantly cut profit margins.
With assets depreciating and cash levels low analysts believe the company will face a struggle to stabilize its fortunes in short-term.
Carvana’s ace in the hole is that they have access to $4.4 billion available liquidity through a short-term credit facility and unpledged assets, including things like real estate and vehicle inventory.
They could tap into this if they have to borrow more money to get through the coming quarters.
But the short-term outlook doesn’t look promising for Carvana with massive sell-offs continuing as they struggle to regain investor confidence.
Contact the author at jeremy@proactiveinvestors.com