Carvana’s Turnaround: Promises Made, Challenges Ahead
Carvana’s recent financial results have sparked optimism among investors. However, a closer examination reveals that the company’s turnaround is still fragile. Despite turning a profit for the first time in 2023, Carvana’s earnings were largely driven by non-recurring gains and debt restructuring.
Financial Results and Turnaround Plan
In 2023, Carvana reported a Net Income of $150 million and an Adjusted EBITDA of $339 million. These improvements were primarily attributed to cost reductions and debt restructuring, rather than revenue growth. The company achieved a record Gross Profit per Unit sold of $5,511, but this was offset by a decline in units sold.
Carvana aims to improve its margins and reduce costs, targeting an Adjusted EBITDA margin of 8% to 13.5%. However, hitting this target within the next two years before cash interest kicks in again will be a challenge.
Debt Burden and Interest Expenses
Despite its debt restructuring, Carvana still has a massive debt burden. Its total long-term debt currently stands at $5.4 billion. While the restructuring reduced the principal, it introduced a high PIK interest rate, which will increase cash interest expenses in the future.
The company will face challenges in paying off its debt and covering high interest costs, especially with a credit rating of CCC+.
Decelerating Revenue Growth
Another concern is Carvana’s decelerating revenue growth. As the company focuses on margins, ad spend has been reduced, leading to a decline in revenue growth. Carvana needs to find ways to prevent further revenue decline while tightening costs.
Valuation and Growth Pathway
Carvana’s valuation remains inflated compared to its fundamentals. CarMax, a more established used car dealership, has a smaller market cap and higher profitability. Carvana’s growth pathway is uncertain, as it faces competition and challenges in executing its turnaround plan.
Key Risk to Bear Thesis
The key bullish case for Carvana is that it executes its turnaround plan properly and exceeds its long-term margin targets. However, the company’s heavy debt burden, high interest expenses, and decelerating revenue growth pose significant risks to its long-term success. Investors should proceed with caution and carefully consider the risks before investing in Carvana.
