How the Disrupted Market for Used Cars Made More Difference Than You Thought
You’ve probably been hearing a lot lately about the rising and falling price of used cars and how Carvana’s stock is in free fall. But have you heard about how those two things are directly connected?
Because the fact is that they are. The same pandemic issues that caused the used car market to be heavily disrupted also gave Carvana its best financial year ever…and its worst. But why – and how – did this happen? Why are the two so heavily connected?
Carvana’s Function and Rise to Power During the Pandemic
Carvana began in 2012 as a fully online used car dealership meant to take the hassle out of car buying and replace it with transparency. The company was well-known for its multi-story car vending machines.
But it wasn’t until 2020 that Carvana truly reached the height of its popularity.
Many consumers were concerned about shopping in person, and new vehicles were hard to come by due to a microchip shortage and the shutdown of some manufacturing plants.
Government assistance money and the introduction of remote work as a mainstream work method meant that car buyers had far more freedom to pick and choose where to get their vehicles from.
These new concerns and advantages made Carvana’s online-only used car company much more popular among consumers. It was one of the few businesses that didn’t struggle and lose revenue due to America’s isolation period.
In fact, the company thrived when comparing its numbers in 2020 and 2021 to the years before.
2021 – Carvana’s Greatest Year
According to Carvana’s annual report, the company had many successes in 2021. Things were looking up for Carvana, from buying and selling their millionth car to becoming part of the Fortune 500 after 9 years of operation.
Carvana’s stock hit a high of $370 in August 2021. It seemed like the company had finally hit its stride, and the annual report expressed high hopes for continuing this upward trend.
But while these were all great and encouraging things, they weren’t what investors were concerned about. Investors were watching Carvana’s income and the state of the used car market very closely during this time.
In 2022, many things changed regarding the used vehicle market and the North American economy. This also created a major change for Carvana.
Carvana’s Fall – Mid-Used Car Market Stabilization in 2022
The used car market had the highest interest rates and prices for used cars so far at the beginning of 2022. Many Americans were being priced out of the automotive market, and some experts said the economic bubble created by the pandemic was about to burst.
In late 2022, the burst happened for the automotive market. New and used car inventory stabilized, prices for used vehicles started going down, and Carvana hit a new low. They even had stock drops and multiple rounds of layoffs.
But how did a stabilized market ruin Carvana? Shouldn’t it have helped bolster the company?
A Trend of Overestimating and Underperforming
To be completely honest, Carvana wasn’t doing well even before the pandemic gave it its best year out of 10.
According to profit information from the same 2021 annual report, 2021 was the first year that the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was zero instead of a negative number.
While total revenue more than doubled between 2020 and 2021, there was still a net income loss of 2.2%. This means Carvana has never had a truly profitable year the entire time it has existed as a company.
For years, the company overestimated its potential and underperformed in profit. Investors could see this. When combined with concerns about the used car market going into 2022 and 2023, it makes sense that investors would pull their support.
This led to further issues for Carvana.
Layoffs and Stock Issues in 2022
Carvana had at least two major layoffs in 2022 – one in May and the other in November. Ahead of the November layoffs, a letter from the CEO – Ernie Garcia – detailed a few reasons why the second layoff was taking place.
Trying to explain why the layoffs occurred, Garcia said, “I think there are at least a couple of factors. The first is that the economic environment continues to face strong headwinds…The second is that we failed to accurately predict how this would all play out and the impact it would have on our business.”
In a nutshell, the two factors that Garcia mentioned were the damaged but recovering market for used cars and Carvana’s failure to predict and protect against the market changes. This resulted in 1,500 people – 8% of Carvana’s workforce – being laid off just before Thanksgiving in 2022.
The lack of support from investors and news of layoffs twice in one year likely caused Carvana’s stock to drop as well, further reducing their revenue and leading to rumors of the company’s impending bankruptcy.
But does that actually mean that Carvana will go bankrupt? What future awaits Carvana in 2023 after such a rough year on top of nearly a decade of profit issues? What can the company do to survive when a stabilized used car market almost killed it?
Where Will Carvana Go from Here?
Honestly, it’s hard to say. On the one hand, Carvana has been operating for about a decade now with little to no actual profit, so the company may survive still.
On the other hand, investors are dropping like flies, and some news outlets are already reporting on Carvana’s “inevitable” bankruptcy. It’s hard to tell where this could all end when 2023 has only just started.
There’s still time in 2023 for Carvana to pull through or finish sinking, so check back often for more information about used cars and influential dealerships!
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