Carvana Bankruptcy? Investors Bail, Stock Value Wiped Out
It seemed like just what car buyers needed: a safe way to buy a car during COVID. Online listings, no haggle and delivered to your door. It was perfect. Caravana even took care of the registration and financing, so you never had to leave your house. Investors thought so too, running up the company’s value to billions of dollars. But now, it looks like bankruptcy is knocking on Carvana’s stacked towers.
What is happening to Carvana?
Investors are fleeing like crazy with no end in sight. From a market capitalization of almost $31 billion in August 2021, it has crashed to under $1 billion now. And falling. So far this month alone the stock value has tanked 13 percent, and we’re only to December 7. In November, it dropped 43 percent.
Carvana’s stock was valued at $231.79 this time last year. Today, it is hanging on at $3.83. Basically, it has lost all of its value.
Hedge fund groups Apollo Global Management and Pacific Investment Management hold around $4 billion in unsecured Carvana debt. Today they have agreed to begin negotiations with the used car company to recover some of that investment, according to Bloomberg. This indicates default is looming as it can’t meet its financial obligations.
Why did Carvana’s value rise so rapidly?
Carvana was slow to catch investors’ eyes when it began in 2012. It was a new way to buy a used car, with its signature tower vending machines. But once the pandemic hit consumers wanted to avoid personal contact. But they still needed cars. Carvana seemed like the perfect solution.
Once the pandemic hit its stride, the feds began doling out stimulus checks. That ignited consumer sales, along with zero interest rates. And car manufacturers were having problems making new cars partially due to COVID, so used cars became a stopgap for those needing better transportation.
That began the price spikes we’ve all witnessed for everything, but especially new and used cars. All of these pieces came together to make Carvana a darling of investors. By August 2021, the company had a market cap of over $30 billion.
But from that high point, it has taken a steep fall, unabated. Once the feds began increasing interest rates, consumer buying cooled off. And businesses that want to borrow to invest pay more too. Which means Carvana doesn’t have access to cheap money.
“… Carvana likely to run out of cash in 2023”
“We now believe that without a cash infusion, Carvana is likely to run out of cash by the end of 2023,” Bank of America Securities analyst Nat Schindler told The Street. “And there is no indication yet of a potential cash infusion, for example, from the Garcia family (CEO Ernie Garcia and his father the chairman), and it is impossible to predict if and when that would occur.”
In May, the company slashed 2,500 jobs from its workforce. Still, it is losing money at a prodigious rate. So now it has announced another cut of 1,500 jobs coming soon.
But honestly, it doesn’t seem as though it could have much effect. So we wait to see what is probably the inevitable bankruptcy of Carvana. That may be what it takes to right the ship. That, or it could be the end.