Carvana’s share price is down 97%. Is there any hope left for it?

Online retailers, and especially automotive sellers, have struggled through 2022. Carvana has been particularly hard hit and is now one of the most shorted stocks on the US stock market. Although the stock is beaten down, there are some calls for optimism.

- Carvana’s revenue rose from $859m in 2017 to $12.8bn 2021, but its debt is high and losses are widening

- Carvana management says $4.4bn in cash and revolving credit facilities will suffice until early 2024

- Amplify’s Online Retail ETF offers exposure to Carvana at a weighting of 1.30%

Carvana [CVNA] is among the most-shorted stocks this year, with 37.5% of the stock being free-float shorted. Now the company has announced an 8% cut to its workforce, things are only going from bad to worse for the company.

As of Friday 25 November’s market close, Carvana's share price has fallen 96.6% in value. It now stands at $7.97, having closed its last day of trading in 2021 at $231.79.

Carvana is an ecommerce platform involved in the resale of used cars in the US. Since listing on the NYSE in 2017, the company’s revenue rose from $859m to $3.9bn in 2019. Due to the online nature of its business and issues with semiconductor supply, Carvana became a go-to for automobile consumers. Company revenue received a further boost, rising to $12.8bn in 2021, and its stock price soared 1,579% from its March 2020 lows to its all-time-high in August 2021.

Since then, the stock has been in a tailspin, and Carvana’s net debt current stands at $5.7bn. Concerns over Carvana’s fundamentals are further exacerbated by the current slowdown in economic growth. In the company’s recent earnings release, it reported an 8% year-over-year drop in units sold for the Q3 2022.

Can Carvana survive?

Carvana’s underwhelming share price performance is nothing out of the ordinary. Carvana CEO, Ernie Garcia, III, noted in the company’s recent shareholder letter that “industry-wide used vehicle sales declined by 10% to 15% YoY in Q3 2022”. Nevertheless, Carvana’s earnings for the quarter stood at $3.4bn, a marginal decline of 2.9% year-over-year.

While things seem bleak for the company, there are some reasons for optimism. Management are on a cost-cutting crusade, with selling, general and administrative (SG&A) expenses down $90m from the prior quarter. Carvana is now focusing on profitability and aiming for $4,000 in SG&A costs per unit sold. They have $4.4bn in cash and revolving credit facilities, which management state will suffice until early 2024. The company is also reducing inventory, which should help improve its cash position and help it get through its current turmoil.

Carvana has been the best performing short in 2022, with short sellers making $4.2bn in marked to market gains in 2022 so far, with famed short seller Marc Cohodes telling the Institutional Investor that the short, “has more than made my year”.

High-growth in a highly cyclical Industry

With Carvana, investors are largely exposed to the ecommerce and automotive industry. Both are highly cyclical sectors, which largely explains the performance of the stock this year. The ecommerce space has exploded in growth since the Covid-19 pandemic.

Statista projects a compound annual revenue growth rate of 13.5% between 2022 and 2027, largely driven by the increased use of technology, which many users became habituated to during lockdown periods. Carvana is at the forefront of this growth, with Statista estimating the car seller will shift 700,000 units in 2025, a 148% growth from 2020.

Carvana has continued its expansion this year, opening new stores in Sacramento, California and Richmond, Virginia, giving it a wide footprint across the US. This expansion was confirmed by Garcia in the company’s Q3 earnings call, where he mentioned Carvana had “gained market share against this industry backdrop despite taking numerous actions that are focused on driving profitability but reduce sales”.

Funds in focus – Amplify Online Retail ETF

Carvana can be found in the Amplify’s Online Retail ETF [IBUY]. As of 25 November, the fund holds a 1.30% weighting of Carvana shares. Among its top holdings are Etsy [ETSY], DoorDash [DASH] and eBay [EBAY].

The ETF is down 52.6% year-to-date, but has climbed back 7.6% over the past month.

Given Carvana’s dismal performance on markets this year, it’s no surprise that few ETFs are currently holding the shares. Of 18 analysts providing 12-month price targets to the Financial Times, however, many seem to be optimistic for the future of the stock. The mean price target of $15.50 indicates a 90.9% upside from the stock’s latest closing price. The low estimate of $5.00 presents the possibility of a further decline of 38.4% over the next year, while the high estimate of $50.00 suggests shares could rise 515.8% from the recent close of $8.12.