Carvana, a renowned used car retailer, has been facing a cash crunch and could be facing bankruptcy.
The reports emerged from published reports and a bearish analyst’s call to slash its share-price target to a meager $1.
During the mid-afternoon trading, Carvana stands at $4.60 a share, which is up on the day.
However, it is also down more than 40% from a week ago.
Carvana is best known for its unique auto vending machine concept.
In recent months, used car prices have fallen from record highs due to higher interest rates making used cars unaffordable for many potential buyers.
Carvana is one of the newer companies in the used car industry.
Although it hasn’t been around for long, the company has already lost money in most quarters since going public in 2017.
Initially, Carvana’s model aims for sales growth instead of short-term profitability.
However, the company’s losses widened even further amid the recent downturn in the sector.
Carvana reported a significant net loss of $1.5 billion in the first nine months of 2022.
The loss is higher than the $105 million net loss in the same period from last year.
The company’s cash on hand was $316 million in September, which is down 22% from the start of 2022.
However, its borrowing capacity increased.
Last month, the company announced it was cutting 1,500 jobs on slower car sales.
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In mid-November, Carvana announced it was cutting 8% of its workforce amid waning demand for used cars.
The slowed demand coincided with sky-high prices and supply shortages.
Demand for used cars diminished was affected by hybrid-working models and higher costs caused by higher interest rates.
As a result, consumers started rethinking their personal mobility options to adapt and trim their daily expenses.
CNBC was among the first to report the layoffs, citing an internal memo about the move.
The memo revealed that Carvana was facing economic headwinds from higher financing costs.
Additionally, the company failed to predict how the headwinds would all play out and their impact on Carvana’s operation.
In November, Carvana’s shares were down 7%, missing expectations for adjusted earnings in the last five quarters as expenses soared and used car demand dropped.
Last Tuesday, Bloomberg reported that major holders of the company’s debt entered a cooperation agreement.
They mutually agreed to work together, giving them more leverage in negotiations with Carvana.
A day later, the company spoke with lawyers and investment bankers about options to manage its debt load amid solvency concerns.
Wedbush Securities analyst Seth Basham slashed his price target on the stock from $9 to $1 in a Wednesday note.
Basham explained that the fact that its debt trading is less than 50 cents in the dollar is a sign of a high likelihood of debt restructuring.
The restructuring could leave the equity worthless in case of bankruptcy; otherwise, the best case would have it highly diluted.
Carvana entered the market a decade ago with the goal of disrupting the used car market.
It offered online car shopping, trade-ins, and distinctive car vending machines,
However, Basham spoke with CNN, telling them that Carvana’s problems are worse compared to other used car dealers.
He explained that the company expanded faster than the sales could support.
“They put the cart before the horse,” said Basham.
“They built infrastructure for a lot more sales than they’re currently doing. And that saddled them with a ton of excess capacity.”
Carvana commented directly about the meetings with lawyers and bankers, saying it is not a party to the cooperation agreement among bondholders.
“Our message to our customers, shareholders, employees, and other stakeholders remain clear,” said the company.
“We are singularly focused on executing on the plan to profitability outlined in our third quarter shareholder letter, and we have substantial liquidity to get us there.”
“In no way do these reports change that strategy.”
However, the reports only addressed a sell-off in shares already underway.
So far in 2022, shares have been down 97% at the close of trading last Friday.
They dropped to an all-time low of $3.55 a share on Wednesday before closing at $3.83 a share, which was down 43% for the day.