Arguably the best performing stock in 2023, Carvana Co. (NYSE: CVNA) remains on a steady upward trajectory following its impressive Q2 performance. With the company smashing analyst expectations for Q2 revenue and EPS, the company shared more positive news regarding its debt. As is, the company reached an agreement with its noteholders to eliminate a substantial amount of its 2025 and 2027 unsecured note maturities and lower its interest expense over the next 2 years. In this way, the company’s profitability prospects improved significantly which could make CVNA stock poised to continue its impressive run since the beginning of the year thanks to its improved outlook.
CVNA Fundamentals
New Hope
Although CVNA surprised investors with much better than expected earnings in Q2, investors are enthusiastic about the stock’s outlook due to the restructuring deal that the company had with its noteholders. Through this agreement, CVNA was able to solve a major issue as it reduced its debt by $1.2 billion by eliminating 83% of its 2025 and 2027 unsecured note maturities – reducing its interest expense by $430 million per year over the next 2 years.
The significance of this deal cannot be overstated since this deal shows the company’s debtors’ confidence in its ability to navigate through its debt successfully without going bankrupt. This is an especially bullish signal for investors since the company now has a better chance to tackle its mounting debt.
Not only that, but the reduction in interest expense will significantly boost CVNA’s profitability prospects since the company had an interest expense of $486 million in 2022 and has paid $314 million in interest so far this year. Based on this CVNA may inch closer to profitability in the next 2 years – especially since it is already working to reduce its costs.
Risks
However, the deal has its own risks that investors should note, chief among them is that it will pay higher interest on all of its debt. In this way, CVNA may find itself in a similar situation when the new notes approach maturity. Additionally, the deal stipulates that the company has to raise a minimum of $350 million by issuing new shares which would dilute current shareholders considering that the company may issue up to 35 million shares or $1 billion worth of shares whichever is greater. Considering the company’s current debt situation, it would be more inclined to raise the full $1 billion which would significantly dilute shareholders.
Despite the deal’s substantial short-term benefits, it could be seen as the management kicking the can down the road which might backfire if CVNA is unable to successfully turn around its business.
CVNA Financials
Looking into CVNA’s Q2 report, the first thing that stands out is its revenues which came at $2.9 billion. While the company’s revenues declined YoY from $3.8 billion, it beat analyst estimates of $2.6 billion. The second thing that stands out in CVNA’s earnings is its gross profit improving YoY from $396 million to $499 million. This improvement was driven by the company reporting a second consecutive record gross profit per unit (GPU) of $6520 – a 94% increase YoY. At the same time, the company’s operating costs declined significantly YoY from $721 million to $452 million which indicates that the company’s turnaround plan is moving in the right direction. Based on this, CVNA’s net loss improved YoY from $438 million to $105 million.
As for its balance sheet, CVNA’s assets decreased from $8.6 billion at the beginning of the year to $7.8 billion. While this may be seen as a negative thing, it was driven by the company’s vehicle inventory decreasing from $1.8 billion to $1.3 billion which is another indicator of the success of the company’s plan. Additionally, the company’s finance receivables held for sale decreased over the same period from $1.3 billion to nearly $1.1 billion which shows that there is strong demand for the company’s loans. Meanwhile, the company’s cash balance increased from $434 million to $541 million which could be attributed to the decline in the company’s vehicle inventory.
Technical Analysis
CVNA stock is in a neutral trend with the stock trading in a sideways channel between $41.2 and $57.3. Looking at the indicators, the stock is trading above the 200 and 50 MAs which is a bullish indication, however, the stock recently broke the 21 MA support which is a bearish indication. Meanwhile, the RSI is neutral at 49 and the MACD is curling bullishly.
As for the fundamentals, CVNA received a major boost in the short term following the debt restructuring deal as it reduced its debt by $1.2 billion and its interest expense by $430 million per year over the next 2 years. However, since the deal stipulates that the company raises capital through issuing new equity, the expected dilution may send the stock price lower. For this reason, investors could wait for the dilution to be over before entering long positions in CVNA stock.
CVNA Forecast
Following CVNA’s debt restructuring deal, the company’s prospects improved substantially due to the $1.2 billion reduction in its debt. At the same time, the company may be closer to profitability than ever as a result of the $430 million reduction in interest expense over the next 2 years – especially if the company continues to reduce its costs at the current pace.
While the company’s plan appears to be moving in the right direction, any setbacks could set the company back significantly as it is set to pay higher interest on its debt based on the deal. In this way, the company may find itself in a similar position in the future if its plan does not provide the anticipated results.
Despite this, the company has been running more efficiently than ever and its ongoing improvements could see CVNA stock continue its impressive run since the beginning of the year on more positive updates.
CVNA Fundamentals
New Hope
Although CVNA surprised investors with much better than expected earnings in Q2, investors are enthusiastic about the stock’s outlook due to the restructuring deal that the company had with its noteholders. Through this agreement, CVNA was able to solve a major issue as it reduced its debt by $1.2 billion by eliminating 83% of its 2025 and 2027 unsecured note maturities – reducing its interest expense by $430 million per year over the next 2 years.
The significance of this deal cannot be overstated since this deal shows the company’s debtors’ confidence in its ability to navigate through its debt successfully without going bankrupt. This is an especially bullish signal for investors since the company now has a better chance to tackle its mounting debt.
Not only that, but the reduction in interest expense will significantly boost CVNA’s profitability prospects since the company had an interest expense of $486 million in 2022 and has paid $314 million in interest so far this year. Based on this CVNA may inch closer to profitability in the next 2 years – especially since it is already working to reduce its costs.
Risks
However, the deal has its own risks that investors should note, chief among them is that it will pay higher interest on all of its debt. In this way, CVNA may find itself in a similar situation when the new notes approach maturity. Additionally, the deal stipulates that the company has to raise a minimum of $350 million by issuing new shares which would dilute current shareholders considering that the company may issue up to 35 million shares or $1 billion worth of shares whichever is greater. Considering the company’s current debt situation, it would be more inclined to raise the full $1 billion which would significantly dilute shareholders.
Despite the deal’s substantial short-term benefits, it could be seen as the management kicking the can down the road which might backfire if CVNA is unable to successfully turn around its business.
CVNA Financials
Looking into CVNA’s Q2 report, the first thing that stands out is its revenues which came at $2.9 billion. While the company’s revenues declined YoY from $3.8 billion, it beat analyst estimates of $2.6 billion. The second thing that stands out in CVNA’s earnings is its gross profit improving YoY from $396 million to $499 million. This improvement was driven by the company reporting a second consecutive record gross profit per unit (GPU) of $6520 – a 94% increase YoY. At the same time, the company’s operating costs declined significantly YoY from $721 million to $452 million which indicates that the company’s turnaround plan is moving in the right direction. Based on this, CVNA’s net loss improved YoY from $438 million to $105 million.
As for its balance sheet, CVNA’s assets decreased from $8.6 billion at the beginning of the year to $7.8 billion. While this may be seen as a negative thing, it was driven by the company’s vehicle inventory decreasing from $1.8 billion to $1.3 billion which is another indicator of the success of the company’s plan. Additionally, the company’s finance receivables held for sale decreased over the same period from $1.3 billion to nearly $1.1 billion which shows that there is strong demand for the company’s loans. Meanwhile, the company’s cash balance increased from $434 million to $541 million which could be attributed to the decline in the company’s vehicle inventory.
Technical Analysis
CVNA stock is in a neutral trend with the stock trading in a sideways channel between $41.2 and $57.3. Looking at the indicators, the stock is trading above the 200 and 50 MAs which is a bullish indication, however, the stock recently broke the 21 MA support which is a bearish indication. Meanwhile, the RSI is neutral at 49 and the MACD is curling bullishly.
As for the fundamentals, CVNA received a major boost in the short term following the debt restructuring deal as it reduced its debt by $1.2 billion and its interest expense by $430 million per year over the next 2 years. However, since the deal stipulates that the company raises capital through issuing new equity, the expected dilution may send the stock price lower. For this reason, investors could wait for the dilution to be over before entering long positions in CVNA stock.
CVNA Forecast
Following CVNA’s debt restructuring deal, the company’s prospects improved substantially due to the $1.2 billion reduction in its debt. At the same time, the company may be closer to profitability than ever as a result of the $430 million reduction in interest expense over the next 2 years – especially if the company continues to reduce its costs at the current pace.
While the company’s plan appears to be moving in the right direction, any setbacks could set the company back significantly as it is set to pay higher interest on its debt based on the deal. In this way, the company may find itself in a similar position in the future if its plan does not provide the anticipated results.
Despite this, the company has been running more efficiently than ever and its ongoing improvements could see CVNA stock continue its impressive run since the beginning of the year on more positive updates.