Carvana Co. Class A

18 Nis

Key arguments in support of the idea.

• Declining used car prices in the U.S. could weigh on the Company's sales.
• Carvana's high debt burden remains a significant risk.

Investment Thesis

Carvana Co. (CVNA) is one of the largest online-only used-car retailers in the U.S.
The Company performs almost all the functions a physical dealer would offer,
including buying and selling cars. Carvana is known for its network of vending
machine car dealerships, where buyers can pick up their purchased cars, avoiding
lengthy communications and checkout procedures. As of December 31, 2023, the
Company operated in 316 major U.S. cities.

Used car prices in the U.S. are trending down. The Manheim Used Vehicle Value
Index, which is one of the key indicators of used car prices, has shown monthly
drops of more than 10% since the beginning of the year against the values of the
previous year. The downward trends in prices are being observed not only in the
wholesale used car market, but also in the new car market. American automakers
in their forecasts for 2024 note that they expect some decrease in selling prices.
These assumptions suggest that Carvana's revenue may remain under pressure this
year after the Company's 2023 earnings showed a 20% y/y decline.

Carvana's cost-cutting initiatives to achieve positive operating margins may not
succeed. The Company remains unprofitable at the operating profit level, but its
growing debt burden is forcing Carvana to focus on margin expansion. As part of
its cost-cutting plan, Carvana has significantly reduced advertising spending and
optimized personnel costs, but overall overhead expenses per car sold increased to
$1,741 in the third quarter of 2023, up from $800 in the first half of 2021. The
reduction in advertising expenses per vehicle sold by more than 20% y/y in 2023
may have contributed to the decline in revenue last year, although it helped reduce
the share of total administrative expenses as part of revenue.

Carvana's high debt burden remains a major risk to the stock. We see that the
Company had $960 million on its balance sheet at the end of last year, which is
lower than the size of Carvana's adjusted net loss for the year. The Company has
nearly exhausted its ability to raise new financing through debt accumulation. On
September 11, 2023, S&P assigned its 'CCC+' credit rating to Carvana, reflecting an
increased risk of default on its obligations. Net Debt/EBITDA'2024 is currently
estimated at 14x based on FactSet's 2024 EBITDA consensus forecast. In the
coming quarters, the Company may need additional financing through the sale of
shares. This step could have a significant negative impact on the stock.

We believe that in the short term Carvana Co. stock may end up in negative zone.

We maintain a Sell rating on CVNA stock with a price target of $60. A stop-loss
order is recommended at $78.