Carvana Runs Out of Gas

Whatever happens, Carvana’s downward spiral shows there’s no easy path to forging the connected economy.

Wednesday, the stock in the beleaguered online car firm plummeted 43% amid reports that creditors have worked out an agreement to enter into negotiations with Carvana to restructure debt. Bloomberg reported that the deal has been worked out between Apollo Global Management and Pacific Investment Management.

Those two investment firms hold $4 billion of Carvana’s outstanding debt, at 70% of the total tally. And there are fears, widely reported in the financial press, that Carvana may be headed towards bankruptcy.

The fact that, as this writing, Carvana’s shares are down more than 97%, speaks volumes on how investors view the name. The stock price degradation, the fundamentals — and SEC filings — show that the bid to have transformed the act of buying a car has hit some serious speed bumps. Because beyond the digital conduits of matching supply and demand, there exists a slew of logistical concerns, the last mile. The connected economy is a link of interrelated activities — and some links functioned more efficiently than others.

The Peak Seems Long Ago

The days when the stock traded at $370 a share seem long ago and far away, but August 2021 is less than a year and a half in the rearview mirror. Now the stock is about $3.80 a share.

The great digital shift did indeed spur consumers to pivot to online platforms to get their wheels, but the growth in top line, at triple-digit percentage points during the pandemic and into 2021, stalled out. Along the way the company broadened its business model, as units sold surged by double digits, to include wholesale auction platforms and financing. You’re no doubt familiar with the dozens of physical “vending machines” that have dotted the retail landscape.

But drill down a bit, and in the company’s most recent earnings announcement, and the inflationary environment, and economic headwinds, led to an 8% decline in retail units sold, and a 3% decrease in revenues. Management had cited “affordability headwinds.” In the meantime, it seemed management also misjudged the tenor of the market. Earnings details note that the company incorporated the “value of future sales, including from repeat customers and word of mouth, into marketing budget and pricing decisions.”

As for the logistics: In some cases customers’ delivery destinations were a long distance from inventory (e.g., the Pacific Northwest, according to company materials). Logistics expenses, according to the most recent data, were $57 million in the third quarter, up from $40 million last year even as operating revenues declines — and thus, margin pressures accrue.

The balance sheet shows $316 million in cash, short term revolving facilities of $575 million and long term debt of $6.6 billion, and negative operating cash flow through the first nine months of the year to the tune of $585 million. Last month the company said it would lay of 12% of its staff.

No easy path lies ahead — and one wonders if, for a company that sought to disrupt the proverbial kicking the tires and finding the right car, it’s the end of the road.