Bloated And Burning Cash: Why This Analyst Doesn't Love Car Retailer Stock Carvana

“Deterioration in market conditions, a bloated cost structure, and high cash burn” are causing Wedbush analysts to foresee a darker future for used car dealer Carvana Co. CVNA.

The Analyst

Seth Basham downgraded Carvana’s rating from Outperform to Neutral while lowering its 12-month price target from $50 to $15.

The Tempe, Arizona-based company will likely execute a capital raise or a real-estate sale in the coming months to compensate for an upcoming lack of cash.

See Also: Carvana Whale Trades Spotted

The Thesis

• Acquiring Adesa's U.S. physical auction business from KAR Global KAR will weigh on the company’s growth.
• It adds $336 million of incremental annual interest expense due
• It's also "saddling the company with additional reconditioning capacity that it does not need.”
• Carvana’s cost base remains well above levels needed to reach its near-term stretch goal of $4,000 in selling, general and administrative expenses per car (or unit) sold
• Wedbush forecasts a cost per vehicle of $5,500 in the fourth quarter of 2022.
• Carvana will likely have to cut costs (i.e., facility closures) "to stem EBITDA losses."

Separately, Carvana amended a financing deal that reduces its floor plan financing facility capacity from $3 billion to $2.2 billion.

This will limit the company’s ability to sell more than 500,000 units per year without self-financing its inventory.

Car dealers go into floor plan financing schemes that allow them to use a lender's money to finance their inventory. 

The amendment also puts a dent on the company’s liquidity as it now needs to maintain higher cash levels against its credit.

Carvana is burning cash at high rates due to adjusted EBITDA losses, which reached $233 million in the third quarter of this year, as well as high interest payments.

“The company’s $2.5b in cash and equivalents at 2Q22 will decline sharply even as it more heavily relies on its floor plan financing line,” say the analysts.

Carvana will not be able to maintain enough cash to meet its floor plan requirements and finance its business through 2023 without additional liquidity sources, Wedbush added.

The analysts are expecting Carvana to address its cash needs in the coming months through a capital raise or a real estate sale.

Price action: CVNA was $18.24 at the time of this writing.

Photo by Arvid Skywalker on Unsplash.