Carvana Could Run Out of Cash In a Year

Beleaguered car seller Carvana continues to face severe headwinds.

Known as the "Amazon of used cars," Carvana's  (CVNA) - Get Free Report shares have been crushed on the stock market, plummeting by a massive 96.84% year-to-date.

Shares of the company fell again on Nov. 30 when Bank of America analyst Nat Schindler cut his price target to $10 from $43 and lowered his rating to neutral from buy.

Schindler is not convinced the company has enough cash to last for more than a year, stating that Carvana "is likely to run out of cash by the end of 2023. There is no indication yet of a potential cash infusion." 

The stock rebounded slightly by Wednesday afternoon, rising by 2.93% after

Moody's, the rating agency, also cut Carvana's prospects last week and lowered the debt to negative.

It appears that no investors have stepped up to the plate to help out ailing Carvana, including CEO Ernie Garcia, Schindler wrote.

“There is no indication yet of a potential cash infusion, for example from the Garcia family (the CEO [Ernie Garcia] and his father the chairman), and it is impossible to predict if and when that would occur.”

Stock Could Bounce Back

If Carvana receives the much-needed capital, its stock could bounce back. The lack of liquidity results in "a situation where this stock's performance looks binary: either it goes to zero or it is worth many times its current price."

Investors have lost their belief that the company could turnaround in the near term and have punished Carvana by fleeing. Even in the last six months, shares fell by a whopping 74.25%.

Other analysts have also reassessed the future of Carvana and Baird and Cowen, who were both former bulls of the stock, downgraded the company's stock to hold only last week. 

Oppenheimer downgraded the stock on Nov. 15. Analyst Brian Nagel lowered the shares to hold from buy, stating “significant nearer-term operational and financial risks” were the reasons. He did not give a price target.

Sales during the third quarter declined to $3.4 billion from $3.5 billion from the third quarter of 2021, which was much lower than the $3.7 billion that Wall Street had sought.

During the pandemic, Carvana was a sought after stock as consumers gravitated toward buying homes and creating the need to purchase a car.

Since interest rates were nearly zero, it was easy for consumers to finance their purchases of cars and Carvana could pay for its expansion with cheap money.

Went into Debt Five Times

But, Carvana, once hailed as a pioneer for creating its car vending machines, went into debt five times during the pandemic.

As bottlenecks persisted during the shutdowns that occurred during the pandemic, car manufacturers found themselves to be low on inventory as semiconductor chips were in short supply. The lack of inventory pushed both used and new car sales to new levels as demand rose exponentially.

As the Federal Reserve continues to raise interest rates in an attempt to curb high inflation rates, consumers now are facing higher auto loan rates, which makes their monthly payments more expensive.

Fears of a recession and job cuts in some industries such as tech have resulted in consumers taking a wait-and-see approach to making larger purchases, especially ones saddled with student loans.