Executive Summary
- The company makes money from selling second-hand cars and selling the loans it originates together with the sales. The volume of car sales goes down, and is projected to keep on decreasing
+ Q2 results will be influenced by a large one-off sale of car loans which were still on the balance sheet. This income (other sales & revenue) drops straight to gross profit. Unfortunately, its also a one-off income. Especially since car sales are going down, it will have less and less loans to sell in the future.
- Carvana is now projecting its outlook as if this impacts its daily operations, which it does not. Its good to have some debt offloading, but will not be repeated this largely in Q3 ‘23. Net debt will still be sky high, and with Notes at 10.25% rates, interest expenses will still eat up most of the cashflows.
+ Bond prices barely moved on the news and are still considering large haircuts (e.g. Notes due 2029 are trading at 59 vs 100 principal, i.e. a -41% haircut)
Conclusion: we believe CVNA 0.00%↑ will use this pop in its share price to issue new equity (Annual Report notes up to 500m shares are allowed) and will keep on continuing diluting existing shareholders. Current IV premiums on options are very high (+170%), hence we would wait a day or 2 to let the mania settle, and then sell the $40 call option with 21 JUL expiry for $+2 per contract
Note: Depending on the reaction of the share price, and the retail investor craziness, Carvana could sell shares and repay debt with it (which would be the most sensible thing), but it doesn’t change the fact its operating a lossmaking business. We don’t believe a repeat of GME and/or AMC is in the making.
Analysis
Activities
Carvana sells used-cars nationwide in the USA and claims to do this in a ‘disruptive’ way by using online sales.
They operate +30 ‘car vending machines’ (the famous car towers) and work with a large inventory that is showcased online. Although this must indeed help for marketing & lower the hurdle for potential customers, we question the benefits from this model as transporting these cars back & forth nation wide, and providing home delivery feels very labor intensive
The real money is made on the car loan Carvana offers with the sale. Carvana does not hold these on their balance sheet, but sells them off
Financials (Q1 2023)
The company grew rapidly over the past years (low interest rates + abundant capital available) taking on lots of debt for its investments (new IT, new locations, …) and currently sell about 100k vehicles per Q.
This number is dropping rapidly (-25% in Q1 ‘23), both in volume (less cars sold) but also in car price
Over 2022 they continued with the acquisition of ADESA (closing May 2022) issuing $3.2 bio Notes at 10.25% (!). What they are making up in savings on SG&A ($-250m in Q1 ‘23 vs ‘22) is countered by higher interest expenses ($+100m per Q)
Notice also most of the SG&A savings are made in marketing ($-100m per Q). To be seen if Carvana’s name is already that established to allow for the customer to find the company without any advertising made.
Hence net debt keeps on increasing, we are currently at $8.2 bio
Source = finbox.com
