Startup culture has been growing over the past decade and has given the world some brilliant services and products that are here to stay for a long time.
However, many startups, even when successful at the beginning, might make a mistake in assessing the market dynamics and end up on the brink of shutdown or bankruptcy.
Carvana is also a startup founded in 2012 and picked up things well in the beginning. The startup did very well even during the pandemic, but currently, a lot of noise has been around about the company’s bankruptcy.
Is Carvana actually going bankrupt? Should you buy a car from Carvana at this moment? If Carvana is going bankrupt, what factors led the successful business to this scenario?
In today’s article, we will discuss everything you need to know about the rise and downfall of Carvana. We will study Carvana as a case study to explore whether the company will claim bankruptcy or whether these are just false speculations.
So let’s get into it.
- Carvana is an online retailer of used cars which is famous for its car vending machines installed across the United States.
- The company was founded in 2012 and thrived to become the second-largest online car dealer in the US after its rapid growth during the COVID pandemic.
- The company was featured on Fortune 500 list for the year 2021, and Carvana became the youngest company to be listed on Fortune 500.
- The company’s problems began when they didn’t predict an economic downturn amid the end of lockdowns and the pandemic.
- The problems for Carvana included high debt, soaring interest rates, declining demand for used cars, and a lot more.
Evolution of Carvana
An Arizona-based company Carvana was founded in 2012 by Ernest Garcia III, Ben Huston, and Ryan Keeton. The startup, homed in Tempe, Arizona, soon picked up as the founders had a unique strategy to grow their business.
The main idea of Carvana was to offer people used cars and work as an online retailer of cars. They add uniqueness to their business by installing car vending machines for customers looking to buy used cars.
The first vending machine was installed in 2013, and the first fully operational and automated coin-operated vending machine was installed in 2015 in Nashville, Tennessee. According to the stats of 2022, the company had a total of 32 vending machines across the US.
If we talk about the evolution of Carvana, the company had a positive outlook and registered as a public company on NYSE in April 2017. The positive beginnings of Carvana enabled the company to take over the competitor startup called Carlypso.
The series of takeovers hadn’t ended yet, and Carvana took over Car360 in 2018 to expand its AR, machine learning, and 3D computer vision capabilities.
Even Carvana set a record of selling 244,111 vehicles in 2020, the year of the pandemic. This record made Carvana the second-largest online retailer of used cars. Carvana was also featured on the Fortune 500 list of 2021, making it the youngest company to be featured in Fortune 500.
After the rise of the company during the pandemic, the company made heavy investments in enhancing infrastructure and hiring more staff. However, it was not long enough when The Wall Street Journal broke the news of Carvana laying off more than 2500 employees(12% of the total workforce) when the growth projections weren’t met.
Where Did Things Get Wrong?
If we look deeper into how things went on the down track for Carvana, here are some of the factors that played a primary role in the whole current equation:
A Wave Of Success During Pandemic Wasn’t Long-Lived
As mentioned earlier, Carvana received a very positive response during the COVID pandemic, and the company sold around 244,111 cars during the financial year 2020. If we investigate why Carvana saw sharp growth during the pandemic, it is easy to say that the company saw growth as the market for new cars was almost nowhere during that time period. The manufacturing of new cars was completely stopped due to global lockdowns.
Besides, the users find it easier to shop for their cars online instead of visiting the local dealerships. Another thing that added was the government-forced closures of all dealerships and non-essential businesses.
Huge Investment For Infrastructure Expansion And Hirings
When the company experienced record growth in revenues and sales, it didn’t pick the signals as to why the market of used cars was proliferating. As a result, Carvana decided to invest in growing its infrastructure and workforce to meet the increasing demand.
When Carvana witnessed all-time high prices of its stocks to $377 in 2021, the company looked no less than a success story. Finally, the company decided to borrow more money to fund its growth. The acquisition of KAR Global, a used-car auction house for $2.2 billion, was also part of the deal.
Borrowing By Carvana
One side of the equation was that Carvana had to meet the increasing demand for the cars and the other side require the company to spend more money to secure the inventory to meet customer needs. As already mentioned, the company had to invest in infrastructure to meet the increasing demand for used cars. The company’s marketing spendings were also enormous during that period ending up in a situation where debt funding was the only option for Carvana.
When the company was very positive about its future prospects, Carvana had to face some legal issues. Regulators banned the company’s operations in North Carolina in August 2021 due to problems in inspection procedures and the provision of vehicle titles to customers according to regulations. It was not long enough when the Illinois government banned Carvana’s business license in the state on May 10, 2022.
A series of legal issues followed the company, and the company’s license was suspended by the Michigan Secretary of State for several allegations. And yet, it was not the end of the legal issues faced by Carvana.
Dropped Demand Of Used Cars
Since the company made heavy investments after remaining a darling startup during a pandemic, it didn’t see a drop in demand for used cars. The soaring interest rates further worsened the scenario for the company as their outstanding debts also raised with increasing interest rates.
Consequent Losses For the Company
According to the reports, the market of used cars witnessed a year-over-year decrease of 3% in its total size. As a result, the profits of Carvana also dropped by 25% per vehicle sold in 2022 as compared to 2021. The company also laid off over 4000 employees after the huge losses.
What Is The Future? Options
Carvana’s debt was recorded at almost $9.25 billion in September 2022, and only $666 million cash was on hand. And the prospects have been getting worse with time as the company’s earnings per share have also diluted. According to The Wall Street Journal, the company’s notes yield has risen over 30%, which is an indicator of skepticism in the market regarding the company’s ability to pay back the funds.
As speculations have been running across the market, here is what Carvana has been doing meanwhile:
Bloomberg reported in December 2022 that the company had signed a pact with the largest creditor, Apollo Global Management and Pacific Investment Management, for three months. These negotiations of Carvana with its creditors will lead to debt restructuring and new financing agreements to meet the company’s demands. However, these agreements and negotiations do not undermine the speculations of Carvana going bankrupt shortly.
Will Carvana Go Bankrupt? Speculations And Realities
We cannot say with 100% certainty that Carvana will go bankrupt. The numbers of Carvana do not look good, and the economic conditions have also added to the speculations. But speculations are not showing good signs. Yahoo Finance announced that Carvana had been the worst company of the year amid the financial distress and difficulties the company has faced. It is safe to say that Carvana doesn’t have promising prospects for 2023 and the future.
Message From Carvana
Despite the worsening scenario for Carvana, the company’s management has a message for their customers and stakeholders, saying that they are clearly and only focused on executing the profitability plans they highlighted in the Q3 shareholders letter. The company management also signified that they have substantial liquidity to support their plans, and the speculations of bankruptcy & debt restructuring do not relate to the company’s strategy.