Carvana Co. (CVNA, Financial), an e-commerce platform for buying and selling used cars, has been in trouble for a while. Despite its promise to disrupt the traditional dealership model through “an intuitive and convenient online car buying and financing platform,” profitability has proven elusive.
Since its founding in 2012, the company has faced persistent struggles with cash burn. This has forced Carvana to turn repeatedly to capital markets to keep the lights on. Last month, Carvana was forced to go back to this well, despite both a collapsing share price and a deteriorating economic outlook in the wake of the outbreak of the novel coronavirus (Covid-19).
Raising on weakness
Shares had been above $100 for much of February, even climbing above $115 for a brief spell. Yet, when the coronavirus crisis struck the economy, Carvana saw its share price melt along with the rest of the market. Virtually out of cash, Carvana’s position appeared even more precarious, with capital market disruption potentially threatening access to its long-time cash injection lifeline.
Still, with little cash on its balance sheet and ballooning net debt, Carvana had little choice but to go back to the capital market well in an effort to replenish its rapidly depleting cash reserve. On March 30, the company announced its intention to sell 13.3 new Class A shares priced at $45. This translates to gross proceeds of $600 million. The offering price was far from ideal, but it was essential under the circumstances.
Carvana tried to sell investors on the deal by announcing that founder Ernest Garcia III and principal shareholder Ernest Garcia II would participate in the raise, each subscribing for $25 million.
Cash burn continues
According to the offering announcement, Carvana “intends to use the net proceeds from the public offering of Common Stock for general corporate purposes.” This is unsurprising in light of the company’s frenetic cash burn. In 2019, Carvana burned through nearly $1 billion. During the fourth quarter alone, the company burned about $400 million on $1.1 billion in revenue. Ending the year with $1.5 billion in debt and virtually no cash, a raise was only a matter of time.
Things look set to get worse in 2020 as the coronavirus disrupts economic activity and recessionary pressures suppress car purchases. Carvana has already revoked its full-year guidance in the face of the crisis, and Wall Street analysts’ outlook for the company has darkened substantially. According to data compiled by Yahoo! Finance, the analyst consensus estimate for 2020 total revenue has already fallen from $6.03 billion to $5.71 billion. This translates to a bigger economic loss, with analysts now forecasting a loss of $2.18 per share for the year.
More dilution inbound
The story of Carvana has been one of heavy losses. The company has only survived thanks to its ability to sell shares at regular intervals. This has resulted in substantial dilution. In May 2017, Carvana had about 15 million shares outstanding. After this latest raise, there are more than 60 million shares outstanding.
In my view, investors should expect further dilution in future. Carvana is not only still running unsustainable losses with no end in sight, it is also subject to a large float of Class B shares held principally by company insiders. There are currently 101 million such shares, and these can – and likely will – convert into a substantial number of Class A shares over time. This dilution will further punish investors holding this name.
Verdict
Carvana is in a serious financial mess according to my analysis. The latest capital raise pads its cash balance, but it will only go so far. Even before the downturn, Carvana was seeing savage cash burn. With the market and economy in the doldrums, these losses are certain to mount. Even if it can hold cash burn at 2019 levels, Carvana will be out of cash by the fourth quarter.
I am confident there will be further capital raises and dilution in the year ahead. A path to profitability is far less clear.
Disclosure: No positions.
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