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Key takeaways
- Carvana’s Q2 earnings unveiled narrowed losses and better-than-expected revenue
- The used car seller has also announced a $1.2 billion debt restructuring deal with its bondholders
- The subject of several short squeezes this year, Carvana stock was up 40% on Wednesday at the news
Carvana: online used car retailer, meme stock and shorted on the stock market. The stock caught social media interest for all the wrong reasons, but its latest second-quarter earnings beat has given investors a glimmer of hope.
With a record quarterly profit, narrowed losses on earnings per share and a chunky debt restructuring deals in the works, Carvana is looking to return to the heady highs of its 2021 share price. Can it go all the way, or is the company doomed to languish? Let’s take a look.
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What happened with Carvana’s earnings beat?
Talk about a comeback. Used-car retailer Carvana just dropped its earnings release, revealing a record breaking quarter. The retailer reported revenue of $2.97 billion for Q2, which surpassed the $2.6 billion predicted by analysts. Carvana posted a net loss of $58 million, or 55 cents a share, a vast improvement on the anticipated $1.15 a share loss.
There were some misses in the earnings beat – Carvana sold 76,530 cars in the second quarter, which is less than the 76,937 analysts expected – but the jewel in the crown was the adjusted EBITDA figure, which totaled $155 million. That’s nearly triple what the prediction was ($57.5 million).
According to an SEC filing, Carvana also wants to raise $1 billion by selling as many as 35 million shares through an at-the-market offering. Founder and CEO, Ernie Garcia, said in a written statement that “Our strong execution has made the business fundamentally better” and “we are on the right path to complete our three-step plan and return to growth”.
Carvana’s debt restructuring deal
A key part of the excitement for traders was the second announcement: Carvana has secured a deal with most of its term bondholders to cut its debt by $1.2 billion. Its current debt stands at $6.54 billion as of the end of June, which hasn’t decreased much from the previous year.
The bondholders’ agreement, including private equity management firm Apollo, allows Carvana to decrease its 2025 and 2027 unsecured note maturities by over 83%. The arrangement will also lessen the cash interest expense the company has to pay annually by $430 million per year for the next two years.
What does this mean? Carvana just got a whole lot more liquidity to shore up its financial position. Carvana’s CFO, Mark Jenkins, said the deal “significantly increases our financial flexibility” and that the “strong performance of our business in 2023 presented an opportunity for an impactful and win-win transaction for Carvana and its senior unsecured noteholders”.
The market reaction
Investors were spooked when Carvana brought forward its earnings beat plans by two weeks. The stock had fallen 10% in the lead-up to the report, but they needn’t have been concerned. After all the good news, Carvana shares closed at over $55.80 on Wednesday – a vast 40% daily gain for the share price.
Carvana has been a short-squeeze stock this year, as investors betted against the company performing well as used car sales slumped thanks to higher interest rates and inflation. Carvana has rallied 1,032% in 2023, with short sellers losing more than $2.18 billion to date – $646 million of that figure just came from Wednesday’s rally.
Despite the gains, Carvana is sitting at roughly a fifth of its top value: in 2021, the company hit a peak of $361 a share. Short interest is currently at 47% of the outstanding float.
Can Carvana pull it back?
The question in every investor’s mind is whether Carvana, once Wall Street’s darling during the pandemic, can return to its former glory. The company’s debt levels had mounted significantly after Carvana acquired automobile auction house Adesa for $2.2 billion in a debt-funded takeover.
The latest earnings beat is already a significant turnaround from just a few months ago, when we heard rumors of bankruptcy for Carvana swirling in December and the company laid off employees in a bid to stay afloat. At its lowest ebb, Carvana shares were worth just $3.55.
Last week, JPMorgan downgraded the stock to Underweight, citing the valuation as “disconnected materially from fundamentals”. While the Carvana share price slid 7% at the time, that rating could change with the latest earnings beat. The online retailer has been working hard to slim down its inventory, reducing advertising expenses and selling auto loans.
Is the used car market on the up?
Carvana’s comeback naturally relies on the used car sales market regaining buoyancy. Carvana’s Q2 units sold figure is a 35% decrease year over year, the CFO Mark Jenkins told analysts during a Q&A that Carvana’s inventory is down 50% compared to last year.
A predicted plummet in used car prices due to oversupply could further help turn around Carvana’s fortunes. A UBS report predicted a 6% increase in sales for global car production, leaving five million existing vehicles stuck on lots. Cheaper new cars could have a knock-on effect on used car prices.
There are signs the shift is already beginning. Kelley Blue Book reported earlier this week that wholesale used car prices have fallen 11.1% for dealers compared to last year. While that might not immediately translate into price cuts for consumers, the signs are heading in the right direction.
The bottom line
Carvana stock has been under intense scrutiny this year due to short interest, with some parts of the internet calling the used car retailer “the next GameStop.” Whether or not that’s set to materialize, Carvana is clearly working hard behind the scenes to shore up its finances and keep shareholders happy. Coupled with an anticipated pick-up in the new and used car sales market, we could see Carvana regain some of its substantial share losses.
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