Carvana Implodes

Carvana Co. (NYSE: CVNA) seemed like a brilliant business venture. Used car prices rocketed up during the pandemic because of the dearth of new cars, triggered by tight supply chains. Low interest rates created an easy way for people to buy and sell used cars. The company even has an inspection plan to assure car quality. Management was careless, and it has cost Carvana its future permanently. (Click here to see the least reliable cars in America.)

Revenue dropped 24% to $2.8 billion last quarter. Carvana’s loss was $7.61 per share, compared to $1.02 last year. Chief Executive Officer Ernie Garcia III exaggerated what had happened, “This last year has been a massive change in priorities for the company. The world changed on us very, very quickly, and we shifted our priorities very, very quickly. And undoubtedly, that’s been a difficult transition. But I think there’s no doubt that it’s leading to a more efficient company.” He had been flat-footed and managed the situation as poorly as possible.

Investors have been slaughtered as the stock has fallen 91% in the past year. They face an atmosphere in which used prices continue to fall and interest rates continue to rise. The run-up in new car inventory and the Federal Reserve will ensure those trends continue.

Carvana management did not anticipate that car dealers would have vehicles that would come off their leases, most of which last three years. These dealers want to avoid seeing these on their lots as they watch a ballooning of that inventory.

Garcia committed a cardinal sin. He overbuilt in a way that only worked if the economy and his industry favored him permanently. It never does.

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