Carvana shares fall on quarterly losses, analysts warn

(Bloomberg) — Walls are coming down on online used car dealer Carvana Co., whose disappointing quarterly results on Friday sent stocks into freefall and triggered a string of analyst warnings, with JPMorgan dealing the biggest blow.

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This one-off hedge fund darling’s high debt levels suggest there is no equity value left in the stock, JPMorgan analyst Rajat Gupta wrote in a note to clients, adding that he estimates the company’s “cash liquidity” will continue through the end of this year. . Gupta said that if Carvana deploys about half of its real estate capacity, it will bring in funds for another year.

The company’s shares tumbled 21% to $7.93 on Friday, the biggest drop since Dec. 7, after the troubled auto retailer reported a much larger loss than analysts had anticipated. Stocks have been exploding this year, up more than 110% on Thursday as speculative markets surged. Despite Friday’s sell-off, the stock is still up 77% in 2023, recovering from a catastrophic 98% drop last year.

While the problems of the used car market, where prices have begun to fall rapidly after a dizzying rise during the pandemic years, remain difficult to solve, Carvana’s huge debt load remains the main problem.

“The elephant in the room is a $600 million percentage burden, with management suggesting they are willing to add even more if needed for liquidity throughput in the near to medium term,” JPMorgan’s Gupta added.

The company, which has a market valuation of about $1.5 billion, has total debt of about $8.1 billion and cash of about $316 million, according to data compiled by Bloomberg. Meanwhile, the industry is expected to remain tight, meaning demand will continue to be volatile as consumers remain cautious amid recession worries, high interest rates and tight inflation.

The fourth quarter “provided no compelling evidence to refute the bankruptcy thesis, but management remains convinced that additional capital may not be necessary,” Piper Sandler analyst Alexander Potter said, though he noted that Carvana showed some signs of progress, including reduction in operating costs. .

(Updates the degree of fall in the stock price in the title and third paragraph.)

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