Carvana: Mornings After and Crowd Chasing
Excerpt from Footnotes and Flashbacks: Week Ending March 3, 2023
The 4Q22 numbers were filed a little over a week ago along with the 10K, but we thought we would take another look into the details around its history of stock and bond deals. This one will be a case study in the future.
Most of the big financing activities unfolded in 2022 after getting off and running in 2020 during the COVID crisis. The separate commentary we posted on the site (See Carvana: Credit Profile 3-5-23) looks at the massive scale of capital markets deal flow in stock and bonds for a company in online used car retail. The ability to execute on that scale given the cash flow and asset base profile is one of the stranger sequences of major funding events we have seen for a while.
The CVNA funding requires some outlandishly bullish forward valuation theories and cash flow hopes and dreams. Overall, the profile was very “1990s TMT,” so it was not unprecedented. The hole in the cash flow and painfully bad run rates on EBITDA made the sheer scale of the capital raising hard to fathom. An asset-lite services company raising billions in unsecured debt while also issuing common stock with no discernible near term earnings catalysts was coupled with negative cash flow was essentially betting the ranch. The valuations in 2021 came during a period rife with distortions beneficial to their core business (spike in used car demand, shortage of new cars).
We can understand the phenomenon of sell-side “FOMO” for equity bulls on a sector (online auto retailing) with a heavy slate of underwriting fees on the line, but everything had to go right. At the same time, all competition had to stand down. The financial strength and ambitions of the franchised used car dealers and the pace of change ahead in so many areas of the automotive sector (tech-based remarketing platforms, dealership investments in online activities, scarcity of personnel, etc.) made layers of the CVNA analysis unusually bullish when so many moving parts were in play. It was a whiteboard model without a view on what could go wrong.
From here, the follow-through on a $600+ million interest expense bill in 2023 is the reality that CVNA faces. That is at a time when funding costs are rising for asset-based financing and new vehicles (and trade-ins). Car rental companies will get back to their more normalized fleet turnover cycles after booming travel, and will be among numerous variables to watch. There have been a few other online players whose stocks are under duress, and the year ahead will be interesting for how names such as CarMax and the major franchised car dealers move around their chess pieces. Some of those also come with ambitions to bull their way into a bigger role in online auto sales.