How Carvana went from a Wall Street top pick to meme stock trading

Calvana CEO Ernie Garcia III regularly tells Wall Street that “the march will continue” in the company’s mission to become the world’s largest and most profitable used car retailer.

Stock prices have gone wrong for investors this year as well. Within six months, Carvana will trade like a volatile meme stock in cost-cutting measures and layoffs from Wall Street’s preferred used car retailer, which is poised to take advantage of a strong market. became.

The downturn from the bounty of Arizona-based used car retailers was due to a combination of market changes and self-harm, including a nearly 90% decline in stock prices since November. Many traditional dealers continue to report record-breaking or near-record results, further shedding light on Carvana’s problems.

Carbana grew exponentially during the coronavirus pandemic. Shoppers have moved to online purchases Instead of visiting a dealer, we promise to buy and sell used cars at the customer’s home without hassle. However, analysts are concerned about the company’s liquidity, debt growth and growth, and this year is expected to be the slowest since becoming a public company in 2017.

Morgan Stanley’s Adam Jonas wrote in an investor note earlier this month: “With its own approval, it will accelerate growth at exactly the wrong time to slow down consumers, between capacity and demand. It left a big mismatch and caused a liquidity crisis. ” Reduced the company and its pricing target from $ 360 to $ 105 per share.

Deceleration High vehicle price, Among other factors, rising interest rates and fear of recession. Calvana bought a record number of vehicles last year in the midst of highs and rising inflation, in preparation for unprecedented demand that subsequently slowed.

According to analysts, Carvana is still a long way off, but it may have peaked. There are concerns about the future used car market and short-term risks that outweigh the potential rewards.

Scott W. David of Stiffel said in a note to investors last week: “The deteriorating capital markets and the deteriorating trend of the used car industry give us the capital we need to achieve sufficient size and self-financing status. I lost confidence in the road to Calvana to secure it. ” ..

Carvana shares are rated “hold” with a price target of $ 89.30 per share, according to analysts’ estimates compiled by FactSet.

To help with future throughput of vehicle purchases and the time to readjust them, Carvana launched the US business of Adesa, the second largest wholesale vehicle auction provider in the United States, on February 24th. KAR Global For $ 2.2 billion.

At the time, Garcia said the deal “consolidates” Calvana’s plans to become “the largest and most profitable car retailer.” On the same day, he concluded his prepared remarks with investors on earnings for the fourth quarter with “the march continues.”

The deal was welcomed by investors, who have risen 34% over the next two days to over $ 152 per share. It was steadily declining due to recessionary concerns affecting the used car market and other macroeconomic trends.

The company was criticized for spending a lot of money on marketing. 30 seconds super bowl ad, And are not prepared for a potential slowdown or recession in sales. Carvana claims to be over-prepared for the first quarter after being unprepared for last year’s demand.

“We’ve done more than we’ve seen,” Garcia said in a statement on April 20.

The result put the share in the tank during the next week. Garcia explained that the problem was “temporary” and that the company would learn. He acknowledged that Carvana may have prioritized growth over profits as it postponed plans to achieve positive profits “for a few quarters” before deducting interest and taxes.

Online used car dealers struggle to sell bonds, Apollo Global Management At $ 1.6 billion to bail out an agreement to fund Adesa’s deal.

Analysts consider Adesa’s purchases to be “disadvantageous” at a rate of 10.25%. The existing bond already yielded over 9%.Bloomberg News Reported Apollo Investors saved trading after demanding a yield of about 11% on the proposed $ 2.275 billion junk bond and about 14% on the $ 1 billion high-yield bond.

Wells Fargo analyst Zachary Fadem said the disadvantage would be “inevitably delaying” the company’s positive free cash flow until 2024. In a note to investors on May 3, he downgraded the stock and lowered its price target from $ 150 to $ 65 per share.

Joseph Spak of RBC Capital Markets expressed similar concerns about the deal, saying the integration “could be a nuisance” over the next two years or more. He also downgraded the stock and lowered its price target.

“Adesa’s strategic rationale makes sense, but in our view, remodeling and staffing 56 facilities over the next few years will be a continuous final 18-24 months. You may face risky, long-term operational inefficiencies. “

Last week’s Carvana stocks hit a two-year low and then soared 51% on the same day, along with the following “meme stocks.” GameStop When AMC..

Meme strains are some of the selected strains. Suddenly gaining popularity on the internet And it leads to super high prices and unusually high trading volumes.

For example, Carvana’s trading volume on Thursday exceeded 41.7 million, while the average 30-day trading volume was about 9 million.Trading of Carvana shares closed on Thursday At least 4 times.

Nearly 29% of the tradeable Carvana shares are sold out, among the highest percentages in the US market, according to FactSet.

Calvana is about to return to the good grace of Wall Street.Presentation for investors Released late Friday The company upheld the deal with Adesa and renewed its growth and cost reduction plans, including reducing vehicle acquisition costs.

The company said it is refocusing on three key priorities: retail unit and revenue growth, increased gross profit per unit, and demonstrating operating leverage.

“We have made great strides in the first two goals,” the company said. However, he says he needs to do more, especially when it comes to profitability, free cash flow, selling, general and administrative expenses.

In a presentation last week, the company reduced its 2,500 employees, or about 12% of its total workforce, and Carvana’s executive team paid the rest of the year to contribute to the severance pay of retired employees. I reconfirmed the report of withholding.

The largest car retailer in the country, AutoNation, Last month’s report reported first-quarter earnings per share of $ 5.78.The company is actively shifting to used cars. Decreased availability of new cars During a coronavirus pandemic. Used car business revenue increased 47% in the quarter, with overall revenue close to $ 6.8 billion.

Lithia MotorsIs in the middle of Aggressive growth plan To become the country’s largest car retailer, it said its profits more than doubled from the same period last year to $ 342.2 million. Average gross profit per used car (statistics carefully watched by investors) increased 32% to $ 3,037. This is compared to Carvana’s $ 2,833.

“Calvana seems to have gotten a lot of tech stock halos that Tesla has long benefited from,” said Morningstar analyst David Whiston. “Maybe it was a bit generous depending on the market.”

– CNBC Michael bloom When Hannamiao Contributed to this report.