Carvana (NYSE: CVNA) is a used car dealer that has recently announced a new plan. This is good news for the company, which has struggled with financial losses, one-time write-offs, and a growing debt load. In fact, the stock has fallen nearly 95% from its 52-week high, causing investors to worry that Carvana's current course is unsustainable.
With management shifting gears, some investors may be wondering if it's time to buy Carvana's stock, or if it's better to watch from the sidelines for progress on the company's self-imposed milestones.
However, there are significant risks associated with investing in Carvana at this point. For instance, the company has yet to achieve full-year profitability, with losses growing from $1.63 per share in 2021 to $15.74 per share in 2022. While a goodwill impairment accounted for a significant portion of the loss in 2022, this alone is a concerning sign.
Essentially, Carvana believes that the value of its brand has been significantly tarnished, leading the company to write down the value of its goodwill by $847 million. Goodwill is an accounting figure that places a value on a company's brand and other intangibles. It is also where the cost above the value of the assets of an acquisition gets placed.
Unfortunately, this is not the only admission of trouble for Carvana. As a relatively young company, Carvana has been focused on growth, even if that meant losing money in the short term. However, events in 2022 led to "a significant shift in our priorities away from growth and toward profitability." This suggests that what the company was doing up until that point was increasingly unsustainable, and Wall Street has finally taken notice.
While Carvana is trying to get onto a better path, the process is only just beginning. As such, only the most aggressive investors may want to consider investing in the company at this time.
One of the biggest things to watch for is whether Carvana can achieve its self-imposed goals. Management has laid out some broad targets, which is good news for investors as they have a benchmark by which to hold the leadership team accountable. However, if these goals are not met, it may be wise to steer clear of the stock.
Over the next year, investors should pay attention to several key things, including:
- Carvana's goal of completing an annualized SG&A reduction of over $1 billion compared to the first quarter of 2022 by the second quarter of 2023.
- Gross profit per unit (GPU), which is expected to have bottomed out in the fourth quarter of 2022, with future quarters showing improvement back toward GPU of $4,000.
- Carvana's progress toward positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization).
While these goals are reasonable, it's important to remember that there are still headwinds for Carvana. For instance, the company's cost-cutting efforts have required it to reduce advertising spending, which could make it harder to attract customers to the brand. Additionally, Carvana only entered five new markets in 2022 and has no major plans to expand its reach in 2023. This comes after around seven years of very rapid expansion, suggesting that future expansion opportunities may not be all that compelling.
Furthermore, Carvana's debt load rose significantly in 2022, more than doubling year over year due to an acquisition, which led to a material increase in interest expense. This figure nearly tripled year over year in the fourth quarter. Companies that are losing money and carrying significant debt on their balance sheets often find themselves in a race against time.
I am not a financial advisor, do your own research please.
