Why You Should Avoid Carvana Even if it Avoids Bankruptcy

Key Points

• Carvana stock is falling sharply on concerns that the company is headed for bankruptcy. 
• The company is facing macroeconomic headwinds as it attempts to reach a profitable scale. 
• The precarious state of the company’s finances leave it with several options; but bankruptcy may be the least bad option. 
• Even if the company avoids bankruptcy, the stock will be worth just pennies.  

Carvana Co. (NASDAQ: CVNA) shares are down nearly 66% since the beginning of the week on concerns that the company may be headed for bankruptcy. In fact, CVNA stock took a luld (limit up limit down) pause on the morning of December 7.  

This came after Bloomberg reported that several of Carvana’s largest creditors including Apollo Global Management and Pacific Investment Management Co. signed a pact that binds them to act together to prevent creditor fights in the event of a debt restructuring. This is leading many investors to believe that a bankruptcy filing is imminent.  

That seems likely given the company’s debt situation. But even if it’s not, the only investors that have profited from CVNA stock are those who have taken short positions. And a prominent analyst is downgrading the price target for the stock to $1.  

The Other Shoe Dropped 

Carvana was one of the pandemic winners as the company benefited from a confluence of low-interest rates, rising used car prices, and a public health emergency that made the company’s digital-only model an ideal option.  

And investors that bought CVNA stock made a healthy profit. From its low of $29.35 at the onset of the pandemic, the stock soared 1,129% to close at $360.98 in August 2021.  

While I won’t go far as to say what happened next was the result of the Greater Fool theory, there were warning signs that suggested it was time for investors to get out of the stock. And those warnings are now weighing down not only the stock but the immediate future of the company. 

The Federal Reserve’s aggressive campaign to raise interest rates from historically low levels has the potential to stifle consumer demand. As used car inventories rise, prices have to come down. This is working against Carvana. In fairness, not so much on its top line, although revenue does appear to have peaked. But the company wasn’t yet profitable and th 

Furthermore, the rising interest rates make it difficult for low- and middle-income consumers to finance a car loan even if there are more available. The high rates are also a problem for Carvana because they make it more difficult for the company to service its existing debt and it makes taking out new loans more expensive.  

Carvana Has Many Options But Limited Time 

So bad is Carvana’s financial situation. As of the company’s most recent earnings report, it had $316 million in cash and cash equivalents. But it had $6.6 billion in long-term debt. That leaves the company with no easy options. 

For example, it could try to raise additional debt to refinance its loan portfolio. But as noted above, higher interest rates will make this a more expensive proposition by increasing interest expenses and further weighing on profits.  

The company could also sell more of its stock. But that option is generally seen as a negative by shareholders and may cause further selling activity.  

However, either option would be preferable to bankruptcy if the company believes the economic outlook will quickly improve. And that gets to the root of the issue. Time isn’t on Carvana’s side. And that’s why bankruptcy is likely and it’s best to avoid CVNA stock at this time.