A long road ahead, but a break for Carvana

Slowing inflation reported this week appeared to temper the gloomy outlook on Carvana Co. that had set in since the online used-car retailer reported sharply disappointing third-quarter results earlier this month.

Carvana’s $508 million net loss sent the company’s shares tumbling to an all-time low of $6.50 early this week. Shares sank more than 53 percent in the two trading days, wiping out more than half of the retailer’s market value as investors took a more skeptical view of used-car sales and Carvana’s ability to navigate through shifting demand. The company’s once-lofty market capitalization tumbled to about $1.4 billion from $2.6 billion before the problematic earnings report. Both numbers are a far cry from the $60 billion valuation Carvana commanded last year when its stock price topped $360 per share.

But by week’s end, the share price had started to recover, seemingly benefiting from the lift to the broader stock market when slowing inflation numbers were reported Thursday. Carvana’s share price rose Thursday and into Friday, closing the week at $11.88, up 19 percent.

Carvana — which allows its customers to buy a car from anywhere but also operates several high-visibility “vending machine” physical locations — saw its market value skyrocket last year when supply challenges in new-car production caused a surge in demand for used vehicles. That helped lure investors hungry for COVID- lockdown bets, especially given Carvana’s focus on at-home purchasing.

But the environment has changed this year as supply snarls ease, vehicle production gradually normalizes and the cost of used cars falls fast. Plus, the Federal Reserve’s fight against inflation has sent interest rates higher, raising the cost of financing vehicle purchases and weighing on consumer demand.

“Cars are extremely expensive and they’re extremely sensitive to interest rates,” Carvana CEO Ernie Garcia said on a conference call after the company’s earnings release earlier this month.

The closely watched Manheim Used Vehicle Value Index, which tracks used-vehicle prices, dropped in October for a fifth-straight month, down 10.6 percent from a year earlier. It’s the biggest such decline in the almost 28-year history of the index.

For Wall Street analysts, the shift has presented a substantial challenge to Carvana’s business. On Friday, Morgan Stanley analyst Adam Jonas pulled his rating on the company, saying the stock could be worth as little as $1 as a deteriorating used-car market and volatile interest rate and funding environment “add material risk to the outlook.”

Analysts’ average price target on the company fell 30 percent from the market’s close Nov. 3 through the next Monday.

But some company watchers are still considering how Carvana could recover from this rough patch.

Benchmark Co. analyst Michael Ward on Friday wrote in a research note that higher volume, an improved cost and pricing environment, the benefit of job cuts, more efficient used-vehicle reconditioning and improved logistics should lead to better results for Carvana in 2023.

“Carvana’s brand recognition, in our view, is a competitive advantage, and its ability to leverage the latest technology positions the company as a premium name,” wrote Ward, who rates the stock a hold.

Macroeconomic trends such as demand and inflation aren’t the only issues that have plagued Carvana though.

As its financial losses have mounted and Carvana has faced skepticism on Wall Street, the retailer has been at the center of multiple regulatory actions by state and local licensing agencies, including those in Michigan and Illinois.

Details on another such challenge emerged last week in Pennsylvania where regulators suspended two Carvana Co. locations from performing motor vehicle titling and registration actions.

The online used-vehicle retailer’s locations in Philadelphia and Bridgeville, a Pittsburgh suburb, have been placed on the Pennsylvania Department of Transportation’s list of suspended issuing agents, meaning the outlets are temporarily blocked from handling titling and registration matters, though they can continue to sell vehicles. The department cited Carvana for administrative contract violations, according to a spokesman for the regulatory agency.

Carvana continues to sell vehicles in Pennsylvania, and a spokeswoman for the retailer told Automotive News that the company is working to resolve the department’s concerns.