For years, Carvana (CVNA +2.52%) was one of the fastest-growing stocks on the market.
The online used car dealer put up a remarkable streak of 23 straight quarters of triple-digit revenue growth as it spread across the country with its simple and convenient way of selling used cars, taking much of the hassle out of a process that many Americans disliked.
The pandemic briefly hit pause on the company's rocket-like rise, but sales soared again in 2021 as used car prices surged due to increased demand caused by the pandemic and a chip shortage that constrained new car manufacturing.
However, in 2022, Carvana's long track record of growth and its disruptive business model came undone. The stock fell an incredible 98% as it went from a shining growth story at the beginning of the year to a company on the verge of bankruptcy at the end of 2022. Falling used car prices in 2022 hit Carvana hard, as they meant its inventory lost value as Carvana held it. Its ill-timed acquisition of ADESA, a car auction business, also helped torch the stock as the company took on more than $3 billion in debt to fund the deal, borrowing just as the used car market was imploding. Finally, rapidly rising interest rates have also made it harder for car buyers to purchase cars and will make it more expensive for Carvana to raise capital to stay in business.
As the stock has plunged, Wall Street has become captivated by the story. The one-time disruptor is now trading for less than $5 per share and could go out of business.
Image source: Carvana.
Why everyone is talking about Carvana
There are a few reasons Carvana is getting so much attention.
First, this is an unusual story. It's rare for a one-time market darling to see its fortunes reverse as rapidly as shown in the chart below.
Data by YCharts.
As you can see, Carvana went public in 2017, and the stock soared through 2021, up more than 3,000% at its peak. However, since then, the stock has given up all those gains and then some, collapsing in just a year and a half.
Additionally, some investors are following the Carvana story, because it has significant implications for the used car market. If Carvana were to go out of business and liquidate, it would send used car prices spiraling lower, hurting a wide range of peers, including brick-and-mortar chains like CarMax, other online retailers like Vroom, and mom-and-pop dealerships. The used car market makes up nearly $1 trillion in annual revenue in the U.S., making it a significant part of the economy.
Finally, at least a small contingent of investors is intrigued by Carvana's low stock price and believes the stock could have significant upside potential if it can survive the current crisis. That won't be easy as Carvana finished the third quarter with $6.8 billion in debt, which led to $153 million in interest expense for the period.
NYSE: CVNA
Key Data Points
Is Carvana stock a buy?
Carvana seems to move closer to bankruptcy nearly every week. Creditors have circled the wagons, forging an agreement to work together in the event of a bankruptcy or debt restructuring. Wall Street analysts have consistently downgraded the stock as its outlook has dimmed, and the macroeconomic picture continues to look bleak for the company as interest rates are still rising, and most economists are calling for a recession this year.
Despite growing like wildfire for much of its history, Carvana has never had a positive operating profit on the basis of generally accepted accounting principles (GAAP), and some critics believe its business model simply isn't viable as the company has overpaid for cars in order to ensure it has enough inventory to sell. It did briefly post a slim positive adjusted EBITDA margin in 2020 and 2021, though losses have since returned as used car prices have fallen.
Even if you have a high risk tolerance, Carvana doesn't look like a good buy at this point. The stock has been highly sensitive to macroeconomic news and could continue to move lower if interest rates keep going higher. Additionally, the prospect of a bankruptcy is very real, especially if the used car market continues to weaken.
Carvana does have a chance to bounce back, but even if you're intrigued by the stock's upside potential, you're better off waiting for the macroeconomic environment to improve. If Carvana can survive the next few months, its outlook could brighten if investors believe the worst of the economic downturn is over and used car prices start to stabilize.
