Carvana: From Powerhouse To Flop

The Covid-19 pandemic might have wreaked havoc across countless industries and led to billions of dollars of losses for the U.S. economy, but there were a few companies that gained massively from the past few years of turmoil. Carvana was one of those companies, with its stock price reaching an all-time high of $360.98 per share in August 2021 (via Yahoo! Finance). However, just a year and a half later, Carvana's stock has collapsed over 98% from its peak and currently sits at under $5.00 at the time of writing. A brutal fall from grace, then, for a company that was at one point hailed as the "Amazon of used cars."

The blame for Carvana's fall can't be put down solely on the easing of pandemic restrictions, as the company made a number of poorly-timed investment choices that crippled its ability to continue being an innovator in the industry. With the supply of new cars no longer as badly affected by the global chip shortage, there are early signs that prices of used cars are beginning to correct from their pandemic highs. Carvana's large inventory, combined with the overheads it incurs as part of its unique business model, puts it at a significant disadvantage compared to traditional, location-based used car dealers. Only time will tell whether the company can survive or not, but let's take a closer look at what exactly went wrong for Carvana over the past year or so.

Before the Covid pandemic catapulted Carvana to historic highs, it had already proved to be somewhat of a disruptor in the industry. One of its unique selling points was that, instead of picking up their car from a local dealership, buyers could use one of the company's eye-catching "vending machines." These vending machines were glass towers that were several stories high, with a selection of used cars that could be seen clearly from the outside. When a buyer finalized a purchase, they were given an oversized coin, which they could slot into a retrieval system. This system would then grab the car from its shelf in the vending machine and deliver it straight to the waiting customer in the collection bay.

From that point, the buyer would have seven days to inspect and test the car, to see if it was to their liking. If it wasn't, Carvana would accept the car back for a full refund. The first of these vending machines opened in Nashville, TN, but the company quickly opened more machines at locations across the country. To incentivize users to travel to one of these vending machines, Carvana offered up to $200 of flight credit and a taxi service from the airport for anyone who bought one of its cars (via Business Wire).

In the first quarter of 2022, Carvana reported its first decline in sales, with rising interest rates and falling used car prices causing some customers to hold off on their purchases. At the same time, the chip shortage was showing its first signs of easing, and car manufacturers began to increase production again. Neither second or third quarter sales figures were enough to assuage the fears of most investors, and all of the stock gains from the initial stages of the pandemic were quickly wiped out.

In addition to the number of car sales dropping, Carvana was faced with another problem: too much costly inventory. After buying cars from customers right at the peak of used car prices, Carvana was stuck with lots of inventory that it couldn't shift, at least not for a profit. While those vehicles were sitting unsold, they were also aging, exacerbating the problem. Being stuck with dealerships full of rapidly depreciating assets was bad enough, but by 2022, Carvana also faced more competition than it had done a year or two prior. More traditional dealerships had begun to move their buying process online, and the easing of pandemic restrictions meant that buyers were free to wander around used car lots again.

In an attempt to streamline its network and reduce its overheads, Carvana announced the purchase of the vehicle auction company ADESA U.S. in February 2022. This gave it ready access to wholesale stock and 56 new sites with which to process its used inventory, but left it $2.2 billion in debt. This was right as demand for used cars was beginning to slow down, and the questionable timing of the acquisition caused further concern for investors.

Losses were also beginning to pile up from the company's existing operations, and by the end of the third quarter of 2022, Carvana reported a $2.67 loss per share, bigger than analysts' expectations (via Reuters). Yet again, the stock shrank further, and some began to question whether the company could even survive with its mounting debt pile and shrinking revenue. The company had already laid off a portion of its workforce earlier in 2022 in an attempt to cut costs, and in November, it announced that a further 1,500 jobs would be cut. That represented 8% of its overall workforce, and stretched across several departments, including operations, technology, and corporate.

If Carvana does go under, there are plenty of competitors waiting to take its market share. Vroom and Shift both work on similar business models to Carvana, although they've both had similarly disastrous stock price crashes and it's not clear whether either of them has enough funding to continue operating long-term. Copart, CarMax, and AutoNation are more traditional in their sales experiences, but they control a larger portion of the used car market than any of the three startups, and as a result, have much larger market caps.

That's not to mention the swathes of smaller, local car dealerships that continue to operate up and down the country, unaffected by the whims of Wall Street. Perhaps this is Carvana's biggest problem in the long term — now that pandemic restrictions are now (largely) a thing of the past, it has little to distinguish itself from its competitors ... well, apart from the car vending machines. As neat as they might be, they won't be enough to save Carvana from its billions of dollars of debt, overstocked inventory, and crucially, a stock market that doesn't believe it has what it takes to turn things around.