The Expert Podcast

Look we've been picking on Carvana here and there for many many months Even last year we started noticing things. But this is a pretty provocative article is for motor biscuit and it showed up in some other places is Carvana going out of business. and whether it is or not it's kind of unknown Nobody's really going to know until it does or doesn't go out of business. Their stock is down 90% Their sales are down a lot maybe more than what's on the surface But the question is if they do go out of business why or how will they go out of business. Let's look at some scenarios of how Carvana would or why it would go out of business. Put your comments below let us know what you think If you work for Carvana if you bought a car there. But here's a scenario of how Carvana might be destroyed financially and go out of business. First obviously if their sales decline and they can't pay the bills Then any company who would go out of business. Well Carvana already can't pay its bills from its sales It's sales revenue the profit it makes off its cars In their filings has already been insufficient to pay their expenses. Now that's not uncommon many startup companies you know Uber a lot of other companies lose money at first to build up a market share build up a size of a company and then eventually they start making profit. But Carvana Has been doing this for awhile. They're not making enough money to pay their expenses. Certainly they sell and they make money on the cars But if you add up all the profits on the cars not paying their bills. The question is do they have enough cash to pay that loss for long pier of time it's called a burn rate or runway. So if you're a company let's say that it has you know we use smaller numbers A million dollars in the bank and you lose a thousand dollars a month Well A million dollars Divided by a thousand is a thousand months So you can last a pretty long time You can last a hundred years. But what if you lose $10,000 a month Well now you can last 10 years. What if you lose a hundred thousand dollars a month Well now you can last 10 months. So the question is does Carvana have enough cash to keep Absorbing the losses. And stay in business until such time It makes money and Will the sales and profits increase enough To pay more. In fact there's already some indications That their sales is decreasing. And their net profit is decreasing or their gross profit is decreasing. What else might sink Carvana. Well are there any hidden liabilities in the balance sheet That's you can't see. Do they have a large pool of Financing of vehicles To buyers that they're responsible for. They're lending structure Don't know a whole lot about it Maybe more public knowledge than than we know about But they do some automotive lending internally. Some of it goes through outside banks you know Wells Fargo chase JP Morgan that kind of thing. But They do some internal lending of vehicles What percent of it Who knows and how good are these loans. What if they have you know million cars out on the road with financing the people are never going to pay or there as soon as there's a recession They're going to not be able to pay their car loans That's going to be a loss. Can they afford that I don't know. That could be another reason That they have liability that maybe they're already bankrupt and nobody knows it. The other thing could be their internal Credit line a credit line and financing of their own vehicles their inventory. There are several different ways that a car dealership whether it's Carvana or Joe's Ford dealership Can finance their inventory. All the inventory on the dealership lot adds up to many millions of dollars sometimes tens of millions And in Carvana's case it might be a hundred million dollars worth of inventory. Dealerships finance that inventory They get a line of credit for that. Depending upon how you structure your financing you might be able to double dip that inventory meaning you finance it at one place and then double finance at somewhere else. You're not supposed to You're not supposed to Your lender basically tells you we lend you money on this car You can't borrow against it somewhere else. But it's possible that they have more than one line of credit For their inventory and they might have some of it double pledged. Maybe it wasn't on purpose at first maybe it was an oversight Maybe it was kind of lax accounting but as soon as you start doing that it's a place for you to have all of a sudden some extra cash And once you have it it's very addictive To keep that cash. and maybe you go a little more a little more figuring well someday I'll be able to pay it off. Third thing that could sink Carvana is they took on a large amount of debt almost 3 billion in debt To purchase an auto auction company. Some of that debt was in excess of what they paid for the company. Basically they borrowed more than what they paid for the company. Maybe that debt could be the thing that sinks them Cause it had a high interest rate I think it was 10%. So those other few scenarios that could Bankrupt Carvana. Even not counting a slowdown in sales which they'll probably see that too. We're already seeing a slowdown in auto sales. So If you combine any one or two of those with a slower sales rate and maybe a slower profit margin That could be the thing That makes Carvana go out of business. And this was phrased as a question Look we don't know if any of this is happening. This is all speculation At this point there are company they're operating You know they're getting shut down in some states because of licensing Violations They're having some financial problems Their stock is down but There's no reason to believe on the surface that there's any kind of malfeasance or fraud or anything going on in the company.
But those are reasons that it could happen Hypothetically speculation how any company like Carvana could go out of business You finance too much You borrow too much You have liabilities that nobody knows about And your sales Don't support all your expenses in the long run. That's when you're done. Let us know what you think in the comments.