Well-Known Auto Giant Making Historic Comeback?
Last week shares of used car retailer Carvana plunged by 96% but quickly recovered by 30% this week.
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Carvana, the company that made online car shopping a breeze, has seen a rebound in its stock values after facing significant post-pandemic declines. Shares of Carvana increased by more than 30% on Nov. 10 which was the best day the used car sales giant had seen over the past three months. Carvana’s used car vending machines added a new twist to car buying, something that’s historically been a stressful transaction for many.
Just a week ago, Carvana posted its worst stock day ever, missing Wall Street’s top and bottom line third-quarter expectations. It dropped 39% at $8.76 a share which was near its worst closing price ever in May 2017. The online car retailer’s shares have dropped a whopping 96% this year, sparking concerns that the company is heading for bankruptcy.
Overall, Carvana enjoyed rising car sales and revenues over the past five years. The company’s surge was obvious to analysts, particularly between 2020 and 2021 when many people in the United States were car shopping online during the pandemic. Stimulus checks issued by the government also helped drive sales as people used them for down payments on vehicles.
Used vehicle pricing and profits were also elevated because many consumers had trouble finding or affording new vehicles. This was driven by supply chain problems, especially the global shortage of semiconductor chips which continues to cause headaches for car manufacturers. Rising inflation has made consumers hesitant or unable to pay record-high prices for used cars.
Morgan Stanley analyst Adam Jonas offered input to investors in a letter last week. “While the company is continuing to pursue cost-cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment (bonds trading at 20% yield) add material risk to the outlook, contributing to a wide range of outcomes (positive and negative),” he said. Other analysts have expressed concerns about Carvana’s liquidity, increasing debt load and future growth.
Research analyst Anna Sokolidou said in an article on SeekingAlpha.com that the company’s cash position was getting worse. But despite the bad news, she predicts that Carvana should have ample time to improve its financial situation. “Even if we say that such a pace of liquidity reserve declines is normal for CVNA, it will take the company almost 13 quarters or more than three years to completely deplete the reserves.”
Sokolidou also said that there could be a potential upside to the currently bleak state of the economy. For companies like Carvana, sales improve as household incomes decline. “In other words, second-hand cars are inferior goods,” she said. “So, more people would switch to buying old cars if the economic situation gets worse.”
According to FactSet, Carvana is on the list of Wall Street’s most heavily shorted stocks. Nearly 40% of its shares available for trading are sold short. These stocks are likely to appear in market rallies when investors who originally bet against these companies cover their short positions by buying back borrowed stock.
Doing so can result in something known as a “short squeeze.” Trading website Investopedia describes a short squeeze as, “A market phenomenon in which an unexpected rise in the price of a heavily shorted stock prompts large numbers of short sellers to exit positions by buying the stock, thus driving the price up further.” The higher prices attract new buyers to the security—something that would be good for Carvana and its investors.
Carvana is facing a different type of trouble in Pennsylvania. The state’s Department of Transportation (PennDOT) has “suspended indefinitely” the Bridgeville dealership’s ability to issue and transfer vehicle registrations. The PennDOT suspension stems from over 130 complaints filed by Carvana customers who were unable to drive their vehicles after the company failed to properly process vehicle registrations.
In a statement, Carvana said the registration problems were “minor alleged paperwork issues during the COVID pandemic.” Customers of the Bridgeville location say that doesn’t explain the current problems they are having. One dissatisfied customer said Carvana’s paperwork mishaps resulted in it taking nearly a year for her to receive her Pennsylvania license plate and registration.
