Carvana Stock (NYSE:CVNA)
After a day of rising on news that Carvana (NYSE:CVNA) had adopted a “poison pill” to stave off potential acquirers, the stock is continuing its upward trajectory. On Wednesday morning, Carvana stock rose by more than 7% as investors became more optimistic that the used vehicle reseller might get through a difficult period that has sent the company off track.
What’s the Reason?
Carvana investors have had a rough year. Over the last year, the stock price has dropped by more than 95%, and the company’s primary operation is in danger of failing. After skyrocketing during the epidemic, prices for pre-owned automobiles began to drop precipitously in 2022, in part owing to increases in lending rates. Carvana is struggling to unload a large quantity of stock acquired at peak prices in a down market.
On Tuesday, the business’s adoption of a shareholder rights plan, sometimes known as a “poison pill,” caught investors off guard. In the case that a single investor acquired a 4.9% ownership in Carvana stock, the plan grants current shareholders the chance to purchase shares at a discount, essentially diluting the investor’s position and making it more difficult for anybody to assume control without management’s approval.
The release of a poison pill often increases stock price since investors see it as an indication of an impending takeover battle. However, Carvana has said it is attempting to preserve the NOL carry-forwards and other tax assets to maintain long-term shareholder value. Since NOLs may be used to balance tax liabilities in the future, a corporation might theoretically purchase Carvana, shut down the primary business, and still come out ahead if it used Carvana’s credits to offset profits in other jurisdictions.
On Wednesday, Carvana stock rose again as investors applauded the company’s efforts to strengthen its foundation. The corporation has an agreement to sell Ally Financial up to $4 billion in car loans, which would be a boon to its bottom line. As of September 30th, Carvana has $477,000,000 in liquid assets.
Even if the Ally loan transaction goes through, Carvana’s almost $7 billion in debt is a reminder of how tenuous its situation is. While the company’s attempts to increase liquidity and protect its assets are encouraging, investors should be aware that it is still weak and faces formidable hurdles in the future. The greatest option for the business could be a bankruptcy reorganization, which is a very serious possibility.
Investors should only put a limited amount of their money into Carvana and instead focus on building a diverse portfolio. Selling old vehicles online has a lot of promise. Still, Carvana has to fix several issues before it can thrive again.
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