About Carvana
Carvana started out as quite a promising company, as some alleged it to be the Amazon of cars, as the company essentially operates as an e-commerce platform for vehicles.
The company’s platform offers details and offerings related to selling cars and pretty much anything and everything involved with searching and vetting used cars, including financing and warranty coverage, according to TD Ameritrade’s platform.
From searching on the company’s website for your dream car to then having it either delivered right to your door or opting to pick it up elsewhere, Carvana seems like a company that is intent on integrating today’s technology and yesterday’s cars in order to make the car buying experience more modern and a little more fun, as the company frequently touts its car vending machines.
A bag of Lay’s will do just fine, they can hold off on the car.
At face, one could easily argue that the car buying experience was due for a tune-up, however, it’s certainly worth pointing out that the current bear market combined with the more than frothy used car market has put this company and its stock price through some extensive recent pain.
As the used car market bubble is in the slow and agonizing process of popping, used car prices are steadily declining, which is far from a good thing if you’re a company like Carvana, or any other car seller or dealer for that matter, as it viciously eats into your already thin margins.
Oh yeah, and as a result the company is seemingly on the verge of bankruptcy.
As discussed in previous stock analysis articles, bankruptcy isn’t necessarily as bad as people make it out to be, as it can act as a catalyst for a new beginning.
However, this doesn’t seem to be the case with Carvana, at least at the moment.
During what so far has seemingly been the worst of COVID-19, Carvana’s stock price (NYSE: CVNA) has plummeted a whopping 95%, currently trading at a share price of around $7.
We sincerely feel for those who bought at the top.
Although the car market has been mighty unfavorable towards Carvana and its competitors, the company has some internal issues it needs to figure out as well. For instance, some report that Carvana has allegedly sold stolen vehicles while others also have claimed that they didn’t even so much as receive their vehicle’s registration or title while others have apparently received damaged vehicles as well, not to mention allegations regarding the company delivering the wrong cars to its customers.
If there is any merit to any one of these numerous assertions, we want pretty much nothing to do with Carvana as both customers and investors.
However, amidst all of the noise, we’ll try to bring a little objective clarity as to the severity of Carvana’s current financial situation and ultimately garner a decision as to whether or not this stock is worth considering investing in, potentially buying at a massive new low.
Carvana’s stock financials
To kick this stock analysis article into drive, let’s start off with some basics.
Carvana’s stock (NYSE: CVNA) is currently trading at a share price of a hair above $6, maintaining a market capitalization of $823.2 million all while having no price-to-earnings (P/E) ratio readily available nor does the company issue an annual dividend to its shareholder base.
Given all of the buzz and speculation surrounding the company, all of this makes perfect sense.
Namely, shares of Carvana’s stock are trading at relatively depressed levels, the company has no earnings to display (thus, no P/E ratio), as it likely isn’t yet profitable and thus also can’t afford to pay a consistent dividend out, given the cash drain it would impose.
Moving right along to the company’s balance sheet, Carvana’s executive team is in charge of around $7 billion in total assets along with approximately $6.7 billion in total liabilities, which frankly isn’t as bad as we thought, but it isn’t by any means good, especially as we transition into the current, likely prolonged bear market, both facing the car market and the broader overall economic landscape.
We initially anticipated that this company would already be enveloped in total liabilities, however, we were pleased to find that it still remains total asset-heavy, be it at a relatively negligible degree.
As it relates to Carvana’s income statement, (total) revenue generation has historically (over the last five years) not been an issue.
For instance, the company’s total revenue stood at $859 million in 2017, subsequently rising to just south of $2 billion (in 2018), rising each year thereafter to its latest reported figure of $12.8 billion (in 2021).
Again, oddly enough, things have been pretty good for Carvana in terms of rising annual revenue in recent years, however, we predict its next reported revenue figure(s) to sit well below $12.8 billion given the state of the (used) automobile market in recent years and today.
We’re happy to be wrong, but it’s our opinion, nevertheless.
Turning over to the company’s cash flow statement, it’s nothing but clear that this company is consistently burning through cash as each of the past five years Carvana has reported negative net incomes ranging in the neighborhood of -$164 million (2017) to as low as -$462 million (2020) and from our vantage point there is no end in sight.
It’s one thing if this company was growing and its products were perceived well by the masses, as it would make it more reasonable and less frightening for prospective shareholders such as ourselves, giving us confidence that this company and its executive team are willing to invest aggressively early on and eat up as much market share as it possibly can, however, the market as a whole doesn’t love its products, and for the reasons mentioned early on in this stock analysis article, for fair reason.
Additionally, this company operates in a brutal, thin margin industry.
Therefore, even when the economy is in a state of overwhelming expansion and prosperity, transitioning and remaining in a state of consistent positive cash flow isn’t by any stretch an easy task for a company such as Carvana.
Carvana’s stock fundamentals
This can be supported by taking a look at the company’s trailing twelve month (TTM) net profit margin along with the industry’s average as well.
For example, Carvana’s prevailing TTM net profit margin is -11.26% to the industry’s average of 8.03%.
Although it certainly isn’t uncommon for younger publicly traded companies like Carvana to have a negative TTM net profit margin, at least in the beginning, the upside, at least to us, is both far in the distant future and not really exciting, even if it is somehow achieved.
Odds are that Carvana is, especially in this current market environment, going to strap on a lot more debt in order to just keep its doors open and even when the current recession subsides, is probably going to struggle retaining customers as the company is pioneering the online market for cars, it surely doesn’t negate the fact that it is in direct competition with better established, well capitalized companies like CarMax, Shift, Vroom along with others waiting for Carvana to collapse.
Finally, let’s briefly analyze and discuss the company’s TTM returns on assets and investment.
They are both deep in the red.
Specifically, the company’s TTM returns on assets is nearly -22% to the industry’s average of 15.56% in addition to its TTM returns on investment pecked at almost -29% compared to the industry’s average of nearly 26%.
These figures differ in a major way.
And assuredly not in a good way, as Carvana seemingly has a very, very long road ahead in attaining competitive TTM returns on assets and investment and as alluded to above, net profitability.
Should you buy Carvana stock?
This company is taking on water in an industry markedly known for unexciting net profit margins.
In all fairness, this company isn’t in as bad of shape as we had initially presumed, particularly as it stands with the current posture of its balance sheet, but things are likely to get significantly worse before they get even close to getting better.
The concept of Carvana is a very interesting and in a way, a revolutionary one, however, no company gets points from us in this regard, at least, when it comes to putting our hard-earned money into the company.
Numbers matter.
We have no issues in admitting that we don’t like investing in car stocks or any companies involved in the sale or facilitation of sales thereof.
The margins are just awful, for the most part, especially in the niche market Carvana operates in.
Given all of this information, we give the company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.