If there’s any publicly listed business that needs a crystal-clear recovery road map now, it’s used-car retailer Carvana (NYSE:CVNA). Any prospective CVNA stock buyer should take a close look at Carvana’s financial problems. Then, they need to consider whether the company’s management is properly addressing Carvana’s shortcomings. The preponderance of the evidence indicates that the answer is no.
It’s painful to watch Carvana struggle to survive amid high inflation and elevated interest rates, both of which discourage car purchases. Meme-stock traders might target Carvana for a short squeeze, but sensible investors shouldn’t count on this.
Ultimately, Carvana’s investors have a big decision to make. Will they hold on for a bumpy ride in 2023? After weighing the financial facts surrounding Carvana, the company’s stakeholders should cut their losses and move on.
Huge Debt Load Will Sink CVNA Stock
The decline of CVNA stock, which was worth $100+ a year ago but is now below $10, has been staggering. Unfortunately, Carvana’s heavy debt burden indicates that the company is doomed and investors are holding a toxic stock.
Bloomberg reported that Carvana “has total debt of about $8.1 billion and cash of about $316 million.” That’s alarming, and bear in mind that Carvana will have to pay interest on its debt. JPMorgan analyst Rajat Gupta called Carvana’s “$600 million of run-rate interest burden” the “elephant in the room.”
Moreover, according to Gupta, Carvana’s management suggested that “they are willing to add even more [debt] if needed for liquidity bandwidth in the near to medium-term.” Adding more debt, if Carvana chooses to do this, would really just be a short-term fix but not a permanent solution.
Carvana’s Cost Cuts Won’t Save the Company
Of course, Carvana’s debt load isn’t the only red flag. As CFO Mark Jenkins pointed out in a conference call, Carvana’s fourth-quarter 2022 retail units sold decreased 23% year over year (YOY). Furthermore, the company’s revenue declined 24% and Carvana’s net loss widened from $182 million in the year-earlier quarter to $1.44 billion in Q4 2022.
So, how will Carvana get back on track in 2023? CEO Ernie Garcia proudly declared in a press release, “Over the next 6 months, we will work to complete an estimated $1 billion in annual cost reduction.” Additionally, Carvana will somehow achieve this “while not only maintaining but actually improving our customer experiences.”
That would be a monumental feat but neither that press release nor Carvana’s quarterly conference call clearly and fully explains how the company will achieve $1 billion in cost cuts while “improving our customer experiences.” In the Q4 2022 conference call, Garcia does mention “reducing quarterly [selling, general and administrative] expenses by approximately $100 million in aggregate over the next two quarters.”
The company’s cost reductions will be “broad-based across all large [selling, general and administrative] expense components.” There’s not much in the way of specific details here. Carvana’s investors should demand that the company’s management provide a debt-reduction and cost-cutting action plan right now.
Unfortunately, CVNA Stock Is Doomed to Fail
So, here are the facts. Carvana’s retail units sold and revenue are declining. At the same time, the company’s net earnings loss is widening. Plus, Carvana’s debt burden is large and the company will have to pay interest on that debt.
In response to the company’s problems, Carvana’s management seeks to enact sizable cost reductions. Somehow, Carvana will do this while “actually improving our customer experiences.” Carvana’s management doesn’t seem to offer enough detail about how it will achieve this objective. All in all, it looks like Carvana is doomed to fail and CVNA stock will only lose more value in 2023.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.