Is Carvana Going To Declare Bankruptcy?

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Key Takeaways

  • Carvana is looking to be on the brink of bankruptcy, with yields on their corporate notes above 30% according to the Wall Street Journal.
  • The stock price has jumped in early trading on Thursday after a major crash this week.
  • Despite this bounce, the price has collapsed almost 98% to just over $4 since it’s all-time high of $77 in August 2021.

It’s not looking too good for Carvana right now. The stock has collapsed over the past five days amid bankruptcy rumors, dropping 52.54% from the end of last week to the market close on Wednesday.

The biggest falls occurred on Wednesday with the stock price falling almost 43%. The losses come as rumors spread that Carvana’s major creditors have signed an agreement on the process of negotiating a restructure in the event of bankruptcy.

In short, it appears as if the online used car dealer may be getting their ducks in a row should they go under. It’s an outcome that’s not yet confirmed, but it’s looking increasingly likely by the day.

While the price drops this week have been savage, it’s not the first sign of volatility for Carvana with the stock down almost 98% so far this year.

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Why is Carvana stock down so much?

Like many companies, Carvana stock was pumped up during the Covid-19 pandemic. It was a time where credit was still cheap, and global lockdowns had all but stopped the supply of new vehicles.

It created a huge level of demand for used vehicles, and in particular drove a massive switch to online shopping, even for cars. The idea of avoiding a trip to a dealership during a global pandemic was attractive, for obvious reasons. For many months, even customers who wanted to visit a physical dealership weren’t able due to government enforced closures.

Carvana capitalized on this trend by allowing customers to browse and purchase used cars, all without leaving the house.

By the back end of 2021, Carvana was looking like a major success story. They announced Q2 results which included their first ever quarterly profit and the stock price hit an all-time high of $377 in August.

Yesterday it closed at $4.04.

So how did Carvana fall so far, and so fast? To start with, they’ve borrowed an eye-watering sum of money to fund their growth and general expenses. This included spending $2.2 billion to acquire physical used car auction house KAR Global.

At the same time, used car prices were skyrocketing due to lack of supply. This was a double edged sword for Carvana. On one hand, it meant a greater demand for used vehicles for them, but on the other it meant that they needed to pay high prices themselves to secure their inventory.

Not only that, but Carvana also spent huge sums of money on marketing throughout this period, including splashing out on a commercial during the Super Bowl, with an estimated ticket price of up to $7 million.

Since then, the world has begun to change. We’ve seen a return to normality, with many car shoppers now going back to physical dealerships. Not only that, but with a shaky economy and credit becoming much more expensive, demand for used cars has dropped substantially.

Total used car sales numbers are expected to be 12% lower in 2022 than they were last year. Not only that but Carvana’s profit per vehicle has dropped by 25% compared to this time last year.

Lower sales figures combined with high cost of goods for inventory, plus significant debt servicing requirements, puts Carvana in a difficult position.

Carvana’s debt is a major problem

And about that debt. Total liabilities at the end of September equated to almost $9.25 billion with just $666 million cash on hand. Not only that but diluted earnings per share in the 12 months prior was -$9.05.

This position has caused Carvana corporate bonds to crash hard. According to the Wall Street Journal, the yield on their 10.25% notes has risen to over 30%. Sure, a 30% yield looks nice, but it reflects a huge level of skepticism as to whether the company has the ability to pay back the funds.

Carvana’s prospects don’t look great

The issue isn’t just that Carvana is dealing with these issues, it’s also that they’re likely to get worse over the coming months. Auto loan rates are at the highest levels they’ve been in 15 years, meaning the monthly repayments on vehicles are significantly higher than they were just 12 months ago.

At the same time, the average price for a used car is still near its record high at $28,200 and households are dealing with high prices for everything from groceries to electronics to rent and healthcare.

The Fed has increased interest rates at the fastest rate since the early 1980’s and they’re not likely to stop the cycle soon. Inflation has started to come back down, but it’s still very high on a historical basis.

We can expect to see a number of further rate hikes over the coming year, which is going to make auto loans even more expensive. This is likely to continue to weigh heavily on the demand for Carvana’s sizable inventory.

It’s a sentiment shared by many, with some analysts such as Wedbush Securities’ Seth Bashman slashing 12-month price forecasts to as low as $1. If they survive that long.

What does Carvana’s crash mean for investors?

For investors who are already in, it’s a tough call. Do you cut your losses and salvage what funds you have left, or do you hold on for the chance of a recovery? Obviously that’s not our call to make, but if you’ve ridden this all the way from the peak, the current market price represents close to a total loss already.

For investors on the sidelines hoping to avoid anything similar happening to their own portfolio, there’s a pretty simple strategy to limit the damage.

Diversify.

Sure, that could mean spreading your own investments across a large number of individual stocks, hoping that you’re able to pick more winners than losers. In an economic environment that’s particularly challenging, that’s more difficult now than it was a year or two ago.

Alternatively, you could enlist the help of artificial intelligence to help run your portfolio by using what we call our Investment Kits. At Q.ai, we use the power of AI to analyze massive amounts of data and make predictions on how different investments are going to perform each week. The AI then automatically rebalances your portfolio in line with those predictions.

If you’re looking for a broad portfolio that covers the US stock market, the Active Indexer Kit is a great option which looks to adjust the mix between large caps and small caps, while also adjusting exposure to tech companies.

You can also add Portfolio Protection to this Kit, which utilizes AI to assess your portfolio’s sensitivity to various forms of risk. It then automatically implements sophisticated hedging strategies to help guard against them.

It’s like having your own personal hedge fund, right there on your phone.

Download Q.ai today for access to AI-powered investment strategies.

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