Carvana expected ‘to lose $2 billion in 2022’ on the bottom-line: Analyst

Huber Research Partners Managing Director Douglas Arthur joins Yahoo Finance Live with his insights into Carvana.

Video Transcript


- Carvana-- got to love it. Shares open the day higher before paring gains later in the trading day. Once again rising this question-- is the car vending machine company due for a turnaround story or is it just the latest target for meme stock traders? Here to talk about that is Douglas Arthur, Huber Research Partners Managing Director. Hello, sir. Good to see you. Why in the world is this stock up 118% this year?

DOUGLAS ARTHUR: You got me. It's a good question. I mean, obviously, it was down 94% in 2022. And I think, you know, the correlation between stocks that got pounded, particularly in the second half of 2022, and have had a massive rebound on very little news in early 2023 is high. And Carvana fell the most, and it's had the biggest increase off a very depressed bottom in 2023.

I mean, in early 2022, the stock was around 300 or so, or late 2021, and then it fell to under 5 bucks at the end of 2022. And so it's doubled to 10. I don't really read much into it.

- So, Doug, certainly, totally at odds with the fundamentals of this company. What is the future of Carvana? Lots of talk about the risk of bankruptcy. How likely do you think that is?

DOUGLAS ARTHUR: Well, I think it's pretty likely. I mean, I think they got themselves-- they were in trouble before they went out and raised $3.3 billion of debt in the first half of 2022 to buy ADESA. 2.2 billion of that was to buy the company, and a billion of it was to finance the expansion of it. They're still-- they've got the cash for the expansion still sitting on the balance sheet. So that's probably keeping them afloat right now.

But bear in mind-- I mean, based on my fourth quarter expectations, I expect them to lose $2 billion in 2022 on the bottom line. So that cash is not going to last for long. And the equity market is largely shut off, and the bond market is largely shut off. So where is the money going to come from if they run out of money?

- According to data from S3 Partners, about 66% of Carvana's free float held short. Is there anything-- and this feels a lot like a Bed Bath & Beyond story. Is there anything they could do, in your estimation, to turn around the fundamentals of this company in their future?

DOUGLAS ARTHUR: Well, Ernie Garcia, the CEO, said on the third-quarter conference call that they've got 50 working groups at the company addressing costs and efficiencies and logistics and trying to bring down their costs. So I do expect to see a better cost performance in the fourth quarter than the third quarter.

The problem with any online company is marketing is your biggest cost. You've got to continue to market or consumers forget you exist, right? You don't have storefronts that people are driving by. You have the vending machines, but there aren't that many of them.

So, I mean, when I watch late night cable news, there's still a lot of Carvana advertising. So how much can they bring costs down while their gross profits are being squeezed? That's a tough question for them.

- Do you look at Carvana-- the innovation that, of course, the company did bring, the first mover here into the online used car market, is this something, potentially, of a partnership or a potential takeover that you think maybe could be out there as a potential possibility?

DOUGLAS ARTHUR: 100%. And that's why-- I mean, I've had a low price target all year. I've had a sell on the company since I initiated it back in 2018. Obviously, stock went to almost 400, and now it's back to Earth. But I said in my latest piece I wasn't going to a zero target price because I felt a partnership was likely.

They have innovated. They have-- they were first mover in the online used car business. That's got to be a value to somebody. A bigger company would refinance their debt, which is onerous right now. So I do think that's possible if the Garcias, dad and son, are willing to give up control or some control. That's another thorny question.

- Douglas, taking a look, just stepping back here, as an analyst covering a stock that's trading right now so detached from the fundamentals of the business, does that complicate-- how much does that complicate your coverage of the stock?

DOUGLAS ARTHUR: It complicates it. But, I mean, I pay attention to the bonds, right? So they issued 10 and 1/4 bonds last year to finance ADESA. Apollo bought about half of them. Where are they trading? They're trading at $0.55 on the dollar. 10 and 1/4.

So what does that tell you about-- I mean, the bond market, I think, is being much more disciplined than the stock market, which has got a lot of retail activity, a lot of short covering. It's kind of crazy to watch. I don't think you can take any of it too seriously.

- Is there a real estate play for a GM or a Ford that's looking to expand their footprint?

DOUGLAS ARTHUR: I mean, they have value in the real estate of the ADESA facilities. They are starting to do sale leasebacks on that. I mean, to me, the partnership opportunity is they have created a business. They were a first mover. A lot of the traditional brick and mortars have tried to emulate what Carvana's done. So they have that brand value, and consumers know them.

So could a bigger company take them over or buy a substantial portion of them and give them breathing room and benefit from their technological expertise? And I think the answer to that is unknown, but a possibility.

- All right, Douglas Arthur, great to have you. Thanks so much for joining us here. I think we're all scratching our heads trying to make sense of the Carvana story right now. Certainly, shares have been on a wild ride over the last 12 months. Certainly has been a wild time over the last month or so.