According to S&P Global Market Intelligence, Carvana stock (NYSE:CVNA) fell as high as 16.9% this week.
Analysts downgraded the online used vehicle sector, and an earnings announcement from Ally Financial had a negative impact. The stock (NYSE:CVNA) was down 15.5% this week as of the market closing on Thursday, Oct. 20.
So, what’s the deal?
Ally Financial, a consumer bank and car lender, published third-quarter profits on Wednesday morning. Earnings, sales, and outlook all fell short of expectations, disappointing investors. What has this to do with Carvana? Because Ally is the biggest used vehicle lender in the United States, its performance may provide insight into the condition of the used automobile industry. The two businesses have even formed a collaboration in which Ally gives loans to Carvana’s marketplace customers.
Ally’s third-quarter car originations were $12.3 billion, a $1 billion decrease from the previous quarter. This might signal that Carvana’s market demand is deteriorating. Used vehicle prices are also falling from their all-time highs due to the COVID-19 supply bottleneck. Due to lower car pricing, Carvana may have to write down any automobile inventory purchased at higher prices.
In addition to Ally’s analysis, Wedbush downgraded Carvana stock (NYSE:CVNA) this week. Even though the stock has dropped more than 90% this year, Wedbush believes the business model is faltering. Wall Street despises Carvana stock (NYSE:CVNA) right now; unsurprisingly, the stock fell more than 15% again this week.
So, what now?
Carvana’s market worth has dropped to $2.87 billion as its shares have plummeted. For a firm that produces $14.6 billion in sales, you would believe this is a steal and that it is time to purchase Carvana stock on the cheap. However, investors should use caution when dealing with this firm.
Carvana spent more than $750 million in free cash flow in the first six months of this year and has just $1 billion in cash on its balance sheet. With over $8 billion in total debt, management will find it difficult to obtain financing at any fair interest rate. That implies that unless Carvana can turn its business around quickly, it will either file for bankruptcy or obtain funds via a public offering. Current shareholders will face substantial dilution at these prices if it conducts a stock offering. Whatever happens, present stockholders will most certainly suffer.
Featured Image – Megapixl © Viewimage
Author Okoro Chinedu 
