Carvana Unsure About Near-Term Profitability; Shares Plunge 4%

Shares of Carvana Co. (NYSE: CVNA) were down almost 4% in the extended trading session on April 20, after the leading e-commerce platform for buying and selling used cars reported mixed Q1 results and also announced its plan to raise equity and preferred capital worth $1 billion each.

Investors were more disappointed by the company’s decision to refrain from issuing guidance for the rest of the year due to several macro and other headwinds.

The earnings underperformance can be attributed to the omicron variant, interest rates, and used-car prices impacting the broader industry, as well as company-specific issues of reconditioning, and logistics network disruptions.

Q1 Numbers

The company reported an adjusted loss of $2.89 per share, much worse than the street’s estimated loss of $1.42 per share, and significantly higher than the loss of $0.46 per share reported for the prior-year period.

However, revenues gained 56% year-over-year to $3.5 billion and exceeded consensus estimates of $3.39 billion.

The increase in revenues reflects a surge in Wholesale vehicle sales, which increased 139.6% to $575 million, as well as a 51.8% growth in the Used vehicle sales to $2.7 billion.

Common Stock and Preferred Stock Offering of $1B Each

Concurrent with the earnings release, Carvana announced its plans to offer Class A common stock worth $1 billion via a public offering.

Notably, the founders of the company, including the company’s CEO, expressed their interest in buying up to $432 million of the $1 billion equity issuance.

Further, the company also intends to raise another $1 billion by offering a new series of perpetual Series A preferred stock.

Outlook

Based on the current industry trends impacting customer affordability, high used vehicle prices, rapid movements in interest rates, increasing fuel prices, and other macroeconomic uncertainty impacting the used vehicle market, the company refrained from providing guidance for the rest of the year.

Furthermore, the company pushed out the return to earnings before interest, taxes, depreciation, and amortization (EBITDA) breakeven by a few quarters compared to the original target of turning to profitability in the second quarter of the current year.

However, despite the difficult environment, the company stated that it is seeing positive trends across its key metrics. The company is forecast to continue to gain meaningful market share in 2022, driven by continued growth in retail units and revenue.

Wall Steet’s Take

Following the mixed results, RBC Capital analyst Brad Erickson significantly reduced its price target to $85 from $138 and reiterated a Hold rating.

Erickson believes that “the company’s lofty long-term vision is forcing it into an unnecessarily leveraged situation, leaving virtually no margin of error in the event of mis-execution or demand softening.”

The analyst chooses to remain on the sidelines as he believes that better levels of unit growth need to manifest to meaningfully justify the “capacity hyper-expansion” & “the ever-rising balance sheet leverage”.

However, the Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 11 Buys and seven Holds. At the time of writing, the average Carvana price target was $194.59, which implies 110.4% upside potential to current levels.

Bottom Line

Shares of Carvana have lost more than half of its market capitalization in just the last six months and is trading at near its 52-week lows at $92.50.

While the company considers a multitude of macro and other headwinds, such as high used vehicle prices and rapid changes in interest rates, temporary, investors should be more cautious and wait for more reliable signs of profitability before taking a position in the stock.

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