Carvana: The Value Trap — Still Don’t Buy During This Auto Bubble (NYSE:CVNA)

julianfunk

investment thesis

caravan co (NYSE: CVNA) remains a speculative stock, as it is unlikely to report profitability during further downturns. Therefore, relying on long-term loans to be highly volatile, while retaining its current liquidity and sharing further dilution strategies operating expenses. The recent ADESA acquisition was also at the wrong time, given the increased rates of auto-loan delinquencies and the increased rates of auto repos in the auto bubble.

Therefore, anyone looking for a quick rally or moderate stock recovery will be extremely disappointed, as we do not expect any positive catalysts in its upcoming FQ2’22 earnings call. Anyone looking for bottom-fishing stocks should look elsewhere, as there are other stocks with better long-term value returns for your capital.

Carvana not reporting profitability despite hyper auto sales in FY2021

CVNA Revenue, Net Income, Net Income Margin and Gross Margin

S&P Capital IQ

CVNA has certainly benefited from the subsequent reopening cadence of hyper-demand and hyper-elevated auto prices, which have fueled its revenue growth at an impressive CAGR of 80.1% since FY19. By LTM, the company reported revenue of $14.07B and gross margin of 13.5%, representing a massive increase of 357.1% and 0.6 percentage points, respectively, from FY19 levels. In contrast, CVNA is still struggling with profitability, net loss of -$0.36B and LTM net income margin of -2.6%, a decline of 300%, although roughly in line with FY19 levels.

CVNA Operating Expenses

S&P Capital IQ

The reason why CVNA is yet to report profits is because of its high operating expenses. By LTM, the company reported expenses of $2.35B, representing a massive increase of 297.4% from fiscal 2019 levels. It is also clear that the ratio of its rising gross profit to revenue remains volatile, as these operating expenses still account for 123.5% of its gross profit, although LTM controls more of 16.7% of its revenue.

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CVNA has reportedly embarked on the entitlement of 12% of its existing workforce and optimization of its compensation, advertising, logistics and logistics expenses. Nevertheless, we do not expect much improvement in its operating expenses and profitability given the significant decline in its revenue during the potential economic downturn ahead of the recent acquisition of ADESA’s US physical auction business from KAR Global (KAR). has become even worse.

CVNA Cash/Equivalent, FCF, and FCF Margin

S&P Capital IQ

Therefore, it is not difficult to see why CVNA has not yet reported positive free cash flow (FCF) generation. By LTM, the company recorded an FCF of -$3.35B and an FCF margin of -23.8%, representing a steep decline of -338.3%, though a marginal improvement of 1.3 percentage points, respectively, from FY19 levels. Although CVNA reported relatively modest cash and equivalents of $0.54B on its balance sheet, it is important to note that this was largely fueled by its long-term debt.

CVNA continues to be a huge cash-burn and share-dilution machine ahead

CVNA Long Term Debt, Interest Expense, Net PPE, and CAPEX

S&P Capital IQ

By LTM, CVNA reported long-term debt of $3.04B and interest expense of $0.21B, representing a massive increase of 423.9% and 262.5%, respectively, from fiscal 2019 levels. In contrast, the company also increased its net PPE assets to $2.33B and capital expenditures in LTM to $0.7B, representing significant growth of 347.7% and 304.3%, respectively, from FY19 levels.

For FQ2’22, we expect to see up to $6.34B in debt burden, of which $3.3B is attributable to the ADESA acquisition. While CVNA has reiterated the deal as a key turning point for its goal of “becoming the nation’s largest and most profitable automotive retailer”, we are not convinced as the company continues to grow its total debt/EBITDA for the next three years. remains speculatively unprofitable for years. Eye-watering level ratio of 181.34x by FQ2’22.

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CVNA Loan Maturity

CVNA Loan Maturity

looking for alpha

However, if we study the loan maturities of CVNAs, we are still not overly concerned, as these will be effective only from FY2025 onwards. We expect the same for its debt burden for the ADESA acquisition. Meanwhile, due to its aggressively expanding operating costs and lack of profitability in the normal auto sales environment in H2’22 and FY2023, the company could take on more debt.

CVNA Diluted Shares Outstanding and Stock-Based Compensation

S&P Capital IQ

Therefore, CVNA will be subject to further further share dilution, with LTM reported total $59B share-based compensation (SBC) expense. This has directly contributed to its rising diluted shares outstanding of 90.1M, indicating a massive dilution of 92.3% since FY2019 and a massive 591.2% dilution since its IPO in FY2017. Is. Therefore, assuming a similar rate ahead, we can expect to see CVNA report up to $230 in annual SBC expenses and 215M diluted shares outstanding in FY2025 due to lack of profitability for the next three years. Therefore, the share represents a massive dilution of 1410.7% from its IPO levels. Long-term (and willing) investors beware of this cash-burn and stock-dilution machine.

Analysts not confident about CVNA’s profitability going forward

CVNA Estimated Revenue and Net Income

S&P Capital IQ

Over the next four years, CNVA is expected to report revenue growth at a CAGR of 24.5%, while potentially reporting a net income profitability of $0.4B by FY2025. For FY2022, Consensus estimates that the company will report revenue of -$16B and net income of -$1.38B, representing 24.9% YoY growth over the line, respectively.

Meanwhile, analysts will be watching its FQ2’22 performance closely, with consensus revenue estimates of $3.98B and EPS of –$1.89, respectively, representing YoY growth of 19.31% despite a decline of -87% . However, given the poor EPS performance of CVNA in the last three consecutive quarters, we are not optimistic.

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So, is CVNA stock a buy?Sell ​​or Hold?

CVNA 5Y EV/Revenue and P/E Valuation

CVNA 5Y EV/Revenue and P/E Valuation

S&P Capital IQ

CVNA is currently trading at an EV/NTM revenue of 0.54x and an NTM P/E of -4.72x, lower than its 5Y mean of 3.21x and -85.99x respectively. The stock is also trading at $29.15, down 92.2% from its 52-week high of $376.83, though at a 49.8% premium from its 52-week low of $19.45. Based on the historical stock price action of the last two months, we can potentially predict that CVNA has bottomed out at current prices after a steady decline since August 2021.

CVNA 5Y Stock Price

CVNA 5Y Stock Price

looking for alpha

Still, despite the attractive buy rating of consensus estimates for CVNA at a price target of $61, we’re not convinced of its 109.26% upside. If the company couldn’t report profitability during the past two years of high demand for used cars, we doubt it would do well in a potential downturn. Further, with the incentive program ending with higher rates of auto-loan delinquency and auto repo climbing over the past month, we expect further headwinds for CVNA as consumers move away from costly purchases in the intermediate term.

In the meantime, we don’t expect CVNA stock to recover anytime soon during this bearish market sentiment. Therefore, existing investors with additional capital should simply hold their stock, as there is no point in selling at current prices, especially if one has bought at higher levels. It goes without saying that there are better investments with higher returns for your capital. Prospective investors, don’t waste your time with CVNA.

That’s why we Rate the CVNA stock as a hold for now.