Popular e-commerce platform for buying and selling cars Carvana Co. (CVNA) has a very high short interest. It has a short float of 48.4%. In this piece, I have discussed why it could be wise to avoid this stock now.
CVNA’s EPS and revenue failed to surpass the analysts’ estimates in the fourth quarter. Its loss per share was $5.21 higher than expected, while its revenue was 6.9% below the consensus estimate.
In its shareholder letter, CVNA said, “We came into the year positioned for growth, similar to what we had experienced in our prior nine years. After the pandemic, snarled automotive supply chains and historically rapidly rising interest rates combined to dramatically impact the affordability of used cars.”
“Rising interest rates and market sentiment drove a significant shift in our priorities away from growth and toward profitability. This led to markedly lower volumes than we had positioned for, and, as a result, we have been carrying excess costs,” the company added.
In the fourth quarter, CVNA’s retail units declined 23% year-over-year to 86,977. Its gross profit per unit (GPU) declined by $2,347 to $2,219. For fiscal 2022, the company’s retail units decreased 3% year-over-year to 412,296. Its gross profit per unit (GPU) declined by $1,515 to $3,022.
The company expects to complete an annualized SG&A reduction of over a billion dollars by the second quarter of fiscal 2023. It expects gross profit per unit (GPU) to return to $4,000 this year.
CVNA said, “We currently expect a sequential reduction in retail units solid in Q1 2023 compared to Q4 2022, as we continue to normalize our inventory size, optimize marketing spend, and make progress on our profitability initiatives.”
CVNA’s stock has gained 105.9% in price year-to-date, while it has declined 90.8% over the past year to close the last trading session at $9.76.
Here’s what could influence CVNA’s performance in the upcoming months:
Disappointing Financials
CVNA’s net sales and operating revenues declined 24.4% year-over-year to $2.84 billion for the fourth quarter ended December 31, 2022. Its non-GAAP gross profit declined 55.6% over the prior-year quarter to $232 million. The company’s net loss attributable to CVNA widened significantly to $806 million. Also, its loss per share widened considerably to $7.61. In addition, its adjusted EBITDA loss widened 449.1% year-over-year to $291 million.
For the fiscal year ended December 31, 2022, CVNA’s non-GAAP gross profit declined 29.5% year-over-year to $1.38 billion. Its net loss attributable to CVNA widened significantly to $1.59 billion. Also, its net loss per share widened considerably to $15.74. Its adjusted EBITDA loss came in at $1.04 billion, compared to an adjusted EBITDA of $64 million in the year-ago period.
Unfavorable Analyst Estimates
Analysts expect CVNA’s EPS for fiscal 2023 and 2024 to remain negative. Its revenue for fiscal 2023 is expected to decline 14.9% year-over-year to $11.57 billion. Its EPS for the quarter ended March 31, 2023, is expected to remain negative. Its revenue for the same quarter is expected to decline 25.3% year-over-year to $2.61 billion.
Poor Profitability
CVNA’s 9.19% trailing-12-month gross profit margin is 73.8% lower than the 35.03% industry average. Likewise, its trailing-12-month EBIT margin is negative 10.95% compared to the 7.77% industry average. Furthermore, the stock’s negative 7.42% trailing-12-month levered FCF margin compares to the industry average of 2.05%.
POWR Ratings Reflect Bleak Prospects
CVNA has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CVNA has an F grade for Stability, in sync with its 2.80 beta. It has an F grade for Sentiment, consistent with its unfavorable analyst estimates.
Its poor profitability justifies its F grade for Quality.
CVNA is ranked last out of #60 stocks in the D-rated Internet industry. Click here to access CVNA’s Growth, Value, and Momentum ratings.
Bottom Line
CVNA’s stock is trading below its 50-day and 200-day moving averages of $9.63 and $17.48, respectively, indicating a downtrend. Although inflation has fallen considerably from last year’s peak, it is still elevated. High inflation and high borrowing rates pose a problem for used car buyers. The borrowing rates are expected to climb higher as the Fed is likely to keep raising interest rates.
CVNA’s poor financial results are a testament to its struggles. Its lack of cash on its balance sheet and ballooning debt further means that the company is in a precarious situation. Given its disappointing financials, unfavorable analyst estimates, and weak profitability, it could be wise to avoid the stock now.
Stocks to Consider Instead of Carvana Co. (CVNA)
The odds of CVNA outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Internet industry instead:
Travelzoo (TZOO)
trivago N.V. (TRVG)
Despegar.com, Corp. (DESP)
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CVNA shares were trading at $9.04 per share on Wednesday morning, down $0.72 (-7.38%). Year-to-date, CVNA has gained 90.72%, versus a 7.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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