New York CNN —
Used-car dealership Carvana, which is facing a liquidity crunch, could be heading for bankruptcy, according to both published reports and the view of a bearish analyst who lowered its share price target to $1.
In afternoon trading, Carvana, best known for its vending machine concept, stands at about $4.60 a share, up on the day but down more than 40% from the previous week.
Used car prices have fallen from record highs in recent months as higher interest rates have made used cars unaffordable for many potential buyers. Carvana (CVNA), a relatively new player in the used-car space, has lost most quarters since it went public in 2017 as it aimed for revenue growth rather than short-term profitability.
But his losses have widened amidst the recent downturn in the industry.
The company reported a net loss of $1.5 billion for the first nine months of this year, up from a net loss of $105 million for the same period in 2021.
And its cash on hand was $316 million as of Sept. 30, down 22% year-to-date, despite increased borrowing capacity. It said it would cut 1,500 jobs last month due to slower auto sales.
Bloomberg reported on Tuesday that the main holders of Carvana debt have entered into a cooperation agreement to work together and give them more leverage in any negotiations with the company. And it was reported on Wednesday that the company is in talks with lawyers and investment bankers about options to manage its debt burden amid concerns over its ability to pay.
Seth Basham, a An analyst at Wedbush Securities, cut his target price on the stock to $1 from $9 in a note Wednesday, saying the fact that its debt is trading at less than 50 cents to the dollar is a sign that a “higher likelihood of debt” exists restructuring that could render equity worthless in a bankruptcy scenario…or, at best, severely diluted.”
Carvana launched 10 years ago with a plan to revolutionize the used car market, offering both online car shopping and trade-ins as well as distinctive car vending machines. But Basham told CNN that Carvana’s problems are worse than other used-car dealerships because it was expanding faster than its sales could support.
“They put the cart before the horse,” he said. “They’ve built infrastructure for a lot more revenue than they’re currently doing. And that gave them a lot of overcapacity.”
The company commented directly on the report of talks with lawyers and bankers and only stated that it was not a party to the cooperation agreement among bondholders.
“Our message to our customers, shareholders, employees and other stakeholders remains clear: we are solely focused on executing the profitability plan outlined in our third quarter shareholder letter, and we have significant liquidity to get us there,” the company said in a statement. “These reports in no way change that strategy.”
But the reports only fueled an already ongoing sell-off in shares. Shares were down 97% this year by the close of trading last Friday. They plunged to an all-time low of $3.55 a share on Wednesday before closing at $3.83 a share, down 43% for the day.