We published an update on this Danger Zone pick on July 26, 2023. A copy of the associated report is here.
Carvana’s (CVNA: $6/share) stock dropped more than 50% on December 7, 2022 and, despite rebounding for a month, fell another 9% on January 19, 2023 and 21% in the past week. Recent news that the company adopted a “poison pill” to ward off hostile takeover lowers stupid money risk and supports our thesis that CVNA could fall even further to $0/share. We first made Carvana a Danger Zone pick in April 2019 and identified it as a Zombie stock in June 2022. Since our original report, CVNA is down 90% while the S&P 500 is up 35%. See all our reports on Carvana here.
What Happened?
On December 6, 2022, Bloomberg reported that Carvana’s largest (70% of outstanding unsecured debt) creditors entered into an agreement to cooperate in possible debt restructuring negotiations.
What Does It Mean?
Bankruptcy could be on the horizon. Though Carvana has denied any existing cooperation with creditors, investors have sold shares on the implication that a significant debt restructuring or bankruptcy is imminent.
This News Supports Our Zombie Stock Thesis
Our thesis stated that Carvana’s business is undifferentiated and its cash burn, unsustainable. Given the latest developments, it is clear that creditors and investors are taking notice.
Carvana embraced a growth-at-all-costs strategy and could not turn a profit even with COVID tailwinds propelling its top-line forward. The company is now facing a challenging funding environment, softening demand, and fierce competition from incumbents such as CarMax (KMX) and AutoNation. The latest news leads us to reiterate our view: CVNA is a Zombie Stock, and the company’s imminent liquidity issues could take its stock to $0.
This article was originally published on January 20, 2023.
David Trainer, Kyle Guske II, Matt Shuler, and Italo Mendonça receive no compensation to write about any specific stock, sector, style, or theme.
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