Carvana's Meteoric Rise Comes Crashing Back Down to Earth

Table of Contents

A Welcome Turnaround?

Shares of Carvana, the online-car retailer, skyrocketed Thursday, closing up by 56% from the prior day on news that it expected to post $50 million worth of adjusted EBITDA in the current quarter. This marked a welcome turnaround for the company, which had seen its stock prices plummet from as high as $360 in 2021 to single-digit values.

However, despite topping $25 per share on Thursday in the wake of its profit update, shares of Carvana closed at $19.07 today, erasing much of its recent gains. This sudden reversal raises questions about whether the company’s long-term trajectory has changed enough to warrant a whole-cloth repricing.

What Changed?

Several factors contributed to the decline in Carvana’s stock price:

Debt and Declining Revenue: Despite posting adjusted profitability, Carvana’s debt remains a significant concern, with long-term debt of over $6.5 billion at the end of the first quarter.
Industry Analysts’ Response: Industry analysts expressed skepticism about Carvana’s profit predictions, citing concerns that the company’s adjusted profitability result was a one-time affair.
Falling Revenues: Wall Street analysts expect Carvana to report revenues of $2.57 billion in the second quarter and $2.63 billion in Q3, which is significantly lower than its revenue results for 2022 ($3.88 billion and $3.39 billion, respectively).

A Brief History

Carvana launched in 2013, calling itself the "first complete online auto retailer." At the time, co-founder Ernie Garcia III said the company had cut out physical overhead associated with traditional dealerships, replacing it with "consumer-friendly technology" and offering 360-degree interior and exterior views of its inventory.

In 2015, Carvana began embracing physical retail spaces in a novel way – via multi-story "car vending machines." Since then, the company has secured billions in equity and debt financing, buying a couple of startups (Car360 and Adesa) along the way. Despite these efforts, Carvana has yet to record a real profit.

A Mixed Reaction

While investors initially welcomed Carvana’s profit update, cooler heads prevailed today, casting doubt on the company’s long-term trajectory. However, at around $19 per share, Carvana is worth close to a third more than it was before its latest news. That’s a win for the company no matter how you slice it.

Conclusion

Carvana’s rally may have fizzled out, but the company still has its fans. At around $19 per share, it’s worth close to a third more than before its latest news. While concerns about debt and declining revenue remain, Carvana’s adjusted profitability result is a welcome development. Whether this marks a turning point for the company remains to be seen.

Sources