What happened
Even though shares of Carvana (NYSE: CVNA) roared ahead 30% yesterday, the stock is still down 38.5% compared to where it closed last Friday, according to data from S&P Global Market Intelligence. Fears of bankruptcy for the online used car dealer have sent shares plummeting.
The used car market is in trouble. Just as depleted inventories were beginning to be replenished, causing used car prices to fall, rising interest rates could prove problematic for potential buyers. Because Carvana is stocked with vehicles acquired at higher prices, it is going to have a particularly difficult time reaching profitability.
The stock market is betting that won't happen and that Carvana will careen into the ditch of bankruptcy first.
Image source: Getty Images.
So what
Carvana was a big pandemic-era winner, as buyers had to stay home and were unable to visit dealer lots, all the while receiving stimulus checks.
However, despite the massive influx of customers and the jump in sales, Carvana has never been profitable. Now it is suffering under the weight of this new dynamic in the industry, and its creditors aren't waiting around to find out if the worst will happen.
Bloomberg reported that Carvana's lenders, including Apollo Global Management and Pacific Investment Management, agreed to work together rather than in their individual interests if the used car dealer goes belly up.
According to the report, 70% of Carvana's creditors, representing about $4 billion in loans, signed on to the cooperation agreement.
Now what
Yesterday's burst higher was driven by hopes of a short squeeze, as 44% of Carvana's outstanding shares are sold short. Carvana was one of the most talked-about stocks on Reddit, the site where the whole meme stock phenomenon got its start, and the used car dealer continues to be a favorite for speculation.
It may just be a one-day wonder, though, as shares opened down 6% today. Jefferies analyst John Colantuoni believes Carvana will run out of money by the first quarter of 2023 due to having acquired auction house ADESA in May of this year. Carvana issued $3.2 billion worth of new debt to finance the deal, and with interest rates rising sharply, its finances will be under significant pressure, leading to a messy restructuring.
Carvana maintains it is not in bankruptcy negotiations.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Jefferies Financial Group. The Motley Fool has a disclosure policy.
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