Carvana continues its epic decline, and the months ahead do not show any signs of a turnaround.
Now Jefferies analyst John Colantuoni has issued a note warning that the company which appeared set to touch the moon during the pandemic appears to be on the cusp of running out of cash.
Colantuoni wrote, “For perspective, our model has Carvana running out of cash in 1Q23 without an additional infusion. The deterioration in liquidity was precipitated by worsening unit economics and higher interest payments, following the $3.275 billion debt issuance in May 2022 tied to the U.S. ADESA acquisition.”
At the end of Q3, the company had $477 million in cash on hand. However 2022’s free cash flow was an outflow of over $1 billion. This would point to a complex restructuring process as likely in the near future.
Colantuoni added, “The restructuring process is likely to negatively impact the value of existing equity. We anticipate the restructuring process will be the primary determinant of the stock price, with fundamentals as a distant secondary factor.”
In August of 2021, as people were purchasing cars online to escape cities during the pandemic, Carvana stock hit a record high of $361. However as the pandemic waned, so did demand, and the stock price fell rapidly.
In the first three quarters of this year, Carvana posted a net loss of $1.45 billion.
It is reported a group of ten of the biggest lenders of the company’s unsecured debt have formed a pact to act together if a restructuring occurs. The report specifically named Apollo Global Management, and PIMCO as involved.
Analysts noted the pact could make a restructuring much more difficult, and increase the cost of any cash raise from a cost of capital perspective.
A Carvana spokesperson said in a statement, “Carvana is not involved in any cooperative agreement amongst bondholders and we will not be addressing any questions that arise from actions taken by such bondholders. Our message to our customers, shareholders, employees and other stakeholders remains clear: we are singularly focused on executing on the plan to profitability outlined in our Q3 Shareholder Letter and we have substantial liquidity to get us there. In no way does today’s news change that strategy.”
Jeffries is just the latest critic to slam the stock. On Wednesday, Seth Basham at Wellbush slashed his rating on the stock to Underperform, which saw the stock fall 43% on the session. Basham called a fair price for Carvana at $1, noting how much uncertainty there was for the company, and that even the best scenario at this point was far from a winning solution.
Basham said in an interview, “Best case scenario is that the equity gets very little dilution here, and there’s no bankruptcy situation. The company infuses more capital, either through a real estate sale or otherwise. And we see a debt exchange, which leads to less debt burden going forward. So that’d be the best case. I will point out that the Garcias, who are the CEO and his father, they own over 40% of the company’s equity. And so they have a very big incentive not to let that equity go to zero.”
