Here’s Why Carvana Ran Out of Gas

The car seller's once high-flying stock has crashed. Chip shortages and interest rates are to blame.

A Carvana used car “vending machine” on May 11, 2022 in Miami, Florida. (Photo by Joe Raedle/Getty Images) Getty Images

Once viewed as a major pandemic darling stock, Carvana’s investors have lost faith in the company that was once viewed as the “Amazon of used cars.”

The company’s stock has fallen by a whopping 97.69% in the past year and is now trading at a mere $4.61, a far cry from its 52-week high of $202.69 when it was well-known for creating its car vending machines.

Sales rose initially during the pandemic when interest rates for car loans were far lower while some consumers chose to move out to the suburbs and bought homes and cars. Consumers were met with challenges as the automotive industry lacked enough semiconductors chips due to supply chain constraints during the pandemic, leading to lower car sales.

The higher margins from selling used cars during the pandemic have shrunk as demand has fallen drastically, impacting Carvana’s profit margin.

The car seller is facing a challenging quarter and needs a large infusion of capital from an investor soon or risks running out of cash to operate.

Carvana’s stock took another hit on Nov. 30 when its rating was lowered to neutral from buy when Bank of America analyst Nat Schindler slashed his price target to $10 from $43.

Schindler is bearish on the company’s near-term outlook and said Carvana’s dwindling cash level could run out in less than a year. He said Carvana “is likely to run out of cash by the end of 2023. There is no indication yet of a potential cash infusion.” 

Another downgrade was made by Moody’s, the rating agency, which lowered the debt to negative.

Carvana needs an injection of capital, but investors have stayed away from helping out the beleaguered company and shareholders do not believe the company can turn itself around. Even CEO Ernie Garcia has not offered up any cash for a temporary reprieve, Schindler wrote in a report.

“There is no indication yet of a potential cash infusion, for example from the Garcia family (the CEO [Ernie Garcia] and his father the chairman), and it is impossible to predict if and when that would occur,” he wrote. 

Not having adequate liquidity is troublesome for the company and translates into “a situation where this stock’s performance looks binary: either it goes to zero or it is worth many times its current price,” Schindler said.

Carvana’s revenue fell to $3.4 billion from $3.5 billion during the third quarter, falling from an estimated $3.7 billion from Wall Street analysts. 

The company also incurred debt five times during the past two years.

Several other analysts who were once bullish on the company, including Cowen and Baird, also   downgraded the company’s stock to hold in November. Oppenheimer analyst Brian Nagel also lowered the shares to hold from buy due to the company’s “significant nearer-term operational and financial risks.”

Carvana’s future appears to be bleak as the Federal Reserve said it does not plan to cut interest rates in 2023, making it more challenging for consumers to invest in a depreciating asset while paying high interest rates.

Experian said the average used car loan rate was 9.34% during the third quarter while new car loans rose to 5.16%, up from 8.12% and 4.09% during the same period in 2021. Consumers are now shelling out even more money each month to pay for their cars, reaching the $700 level during the third quarter for new vehicles while used car loans are not far behind and rose to $525 a month.

Fears of a recession are also likely to dampen enthusiasm from consumers in making a large purchase as higher inflation rates pushed rent, food and energy costs up and have eroded any savings people had accumulated during the pandemic while they stayed home.

  Here’s Why Carvana Ran Out of Gas