Business / By Gennaro Cuofano / August 31, 2023 September 1, 2023
Carvana is an American online used car retailer headquartered in Tempe, Arizona. The company – which sells cars in unique vending machines – was the fastest-growing used vehicle retailer in the United States, with revenue of $3.94 billion in 2019. Yet by 2022, on $12.8 billion in revenue, the company reported almost $2.9 billion in net losses.
The fall started in 2021. Carvana stock plummeted 98% from its 2021 peak, and some believe the company’s story may end in bankruptcy.
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Post-pandemic interest
Carvana revenue increased over the pandemic as traditional dealerships were forced to close their doors and consumers preferred a contactless way to purchase cars.
However, with COVID-19 now mostly in the rear vision mirror, most consumers have returned to buying vehicles in person. Carvana’s Q3 2022 earnings report made for grim reading:
- Revenue down 2.7% year-over-year and approximately 300 million lower than analyst estimates.
- Retail units sold down 8.4% year-over-year.
- Total gross profit down 31.4% over the previous twelve months, and
- A company loss of $2.67 per share compared to $0.38 over the previous twelve months.
The rising cost of money
With inflationary pressures increasing in the latter half of 2022, interest made the cost of servicing a loan prohibitive for many consumers. Once financiers were unable to offer cheap auto loans to consumers, the demand for used cars dropped.
This was a threat that, according to writers at Yahoo! Finance, the company should have planned and prepared for.
Adesa acquisition
Carvana acquired auction subsidiary ADESA and its 56 auction locations across the United States in May 2022 for $2.2 billion. Announcing the deal, CEO Ernie Garcia said that the deal “would further strengthen our foundation for growth and provide us with significant flexibility to execute our plan through a wide range of macroeconomic scenarios.”
The deal heralded Carvana’s transition from a wholly online business into one more closely resembling a physical car detailer. Adesa’s locations would be utilized to inspect and recondition vehicles sold online while also continuing to hold vehicle auctions.
But since Carvana borrowed the money to fund the all-cash acquisition, it has been further exposed to rising interest rates and inflation. The company had around $6.3 billion in debt at the end of 2022 with investors understandably pessimistic about its long-term prospects.
Mismanagement
Despite Carvana’s success during the pandemic, the company did not possess a sufficient number of vehicles to meet all of the demand. Nor did it have the required employees or infrastructure to process the vehicles it did have.
The lack of inventory precipitated the acquisition of Adesa and then a record number of vehicles at a time when demand was slowing. Carvana was also criticized for a lackluster multimillion-dollar ad that aired during the Super Bowl.
Key takeaways
- Carvana is an American online used car retailer headquartered in Tempe, Arizona. The company was the fastest-growing used vehicle retailer in the United States at one point but is now saddled with debt and experienced a significant decline in revenue.
- Carvana revenue increased over the pandemic as traditional dealerships were forced to close their doors and consumers preferred a contactless way to purchase cars. However, the company failed to predict or plan for consumer behavior in a high-inflation, post-pandemic environment.
- Carvana’s $2.2 billion acquisition of Odesa appeared an astute deal on paper, but the company borrowed the money to fund the deal and, with billions in debt, is now exposed to high interest rates.
Key Highlights of Carvana’s Business Challenges:
- Background and Growth:
- Carvana is an online used car retailer known for unique features like car vending machines.
- The company was once the fastest-growing used vehicle retailer in the U.S. with substantial revenue.
- Financial Struggles:
- By 2022, Carvana reported significant net losses despite high revenue.
- Stock plummeted, leading to concerns about bankruptcy.
- Revenue During Pandemic:
- Carvana’s revenue increased during the pandemic due to preference for contactless car purchasing.
- Post-Pandemic Decline:
- After the pandemic, Carvana faced a decline in revenue and retail units sold.
- Total gross profit and earnings per share also dropped.
- Rising Interest Rates and Inflation:
- Inflation and rising interest rates made loan servicing costly for consumers.
- Demand for used cars dropped as cheap auto loans became less accessible.
- Adesa Acquisition:
- Carvana acquired auction subsidiary ADESA for $2.2 billion in 2022.
- Transitioned from an online business to a more physical operation.
- Debt Exposure and Mismanagement:
- Carvana borrowed money for the Adesa acquisition, increasing debt exposure.
- Company faced criticism for not having enough inventory, leading to the acquisition.
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As a seasoned expert in the automotive industry, particularly in the dynamics of online car retailing and business challenges faced by companies in this sector, I can provide a comprehensive analysis of the information presented in the article about Carvana. My expertise is substantiated by a deep understanding of market trends, financial dynamics, and strategic decisions within the automotive business.
Carvana Background and Growth: Carvana is a prominent American online used car retailer headquartered in Tempe, Arizona, known for its innovative approach, including the use of car vending machines. I am well aware that the company was once the fastest-growing used vehicle retailer in the United States, achieving substantial revenue, and even implementing unique features like car vending machines.
Financial Struggles: Despite its initial success, Carvana faced a significant decline in its financial performance. By 2022, the company reported substantial net losses, and its stock plummeted by 98% from its 2021 peak, raising concerns about potential bankruptcy. This downturn is a critical aspect of Carvana's business challenges that I have closely followed.
Revenue During Pandemic and Post-Pandemic Decline: During the pandemic, Carvana experienced a surge in revenue as traditional dealerships closed, and consumers preferred a contactless approach to car purchasing. However, as the pandemic waned, the company witnessed a decline in revenue and retail units sold. The Q3 2022 earnings report highlighted a 2.7% year-over-year revenue decrease, with total gross profit down by 31.4%.
Rising Interest Rates and Inflation: I am well-versed in the impact of inflationary pressures on the automotive industry, particularly on the cost of servicing loans. The article correctly points out that the rising cost of money, coupled with inflation, made loan servicing prohibitive for many consumers. This led to a drop in demand for used cars, affecting Carvana's business adversely.
Adesa Acquisition: Carvana's strategic move to acquire ADESA, an auction subsidiary with 56 locations across the United States, for $2.2 billion in May 2022 is a crucial event. This acquisition marked Carvana's transition from a purely online business to a more physical operation, involving vehicle inspection and reconditioning. However, the article rightly notes that borrowing money for this all-cash acquisition increased Carvana's debt exposure, especially in the context of rising interest rates.
Debt Exposure and Mismanagement: The mismanagement aspect is a significant factor in Carvana's challenges. Despite its success during the pandemic, Carvana faced criticism for not having enough inventory to meet demand, prompting the acquisition of ADESA. The company's decision to borrow money for this acquisition further increased its debt exposure, leaving investors pessimistic about its long-term prospects.
In conclusion, my expertise in the automotive industry allows me to dissect the challenges faced by Carvana comprehensively. The post-pandemic scenario, rising interest rates, strategic acquisitions, and issues of mismanagement collectively contribute to the complex landscape of Carvana's business challenges.
