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Carvana ‘was an amazing idea during the pandemic’ but may not hold up now: Analyst

Argus Research Associate Analyst Taylor Conrad joins Yahoo Finance Live to discuss downgrading Carvana to Sell on weak industry trends, the decline in used car sales, rising interest rates, and the outlook for profit growth.

Video Transcript

- Argus Research is pumping the brakes on Carvana downgrading the used car dealer to sell from hold citing its difficulty to make a profit amid weak industry trends. Argus Research Associate Analyst Taylor Conrad joins us now. Taylor, thanks for taking the time here with us today. All right, so from what you've seen from Carvana as it relates to the used car sales that have more largely kind of halted at this point in time because of high prices and financing becoming more of a headwind for consumers, what type of road forward do you believe we should expect from Carvana?

TAYLOR CONRAD: Well, thanks for having me on. And I first I'd just start by saying that my views on this company are based on our concerns of the direction of the industry, the company's balance sheet, and its path towards profitability. Management is in a tough spot right now. We're going to watch to see how it goes. But they have been taking steps to lower their costs. They've been making some layoffs, and they actually just did one last week as well reported by the Wall Street Journal that they're laying off 1,500 more workers, which is about 8% of their workforce.

In the third quarter, we saw retail units down, revenue was down, and a large part of that is because of used car prices continuing to drop. And as they go down, Carvana isn't-- they're not going to want to refill their inventory as fast, and that brings them to a problem of not being able to provide exactly what the consumer wants.

And in a market where car prices are still high even though they're coming down and interest rates are continuing to go up, and Carvana charges a bit higher of an interest rate than some of its competitors, that definitely drives down sales for them. And going forward, it's going to be tricky for them, and we're going to need to see if they can make more steps to cut costs to be able to pay their debts and get through this rough part right here.

- Yeah, Taylor, a lot of debt on that balance sheet company is burning through a lot of cash, a lot of competition out there. Is the reality that Carvana just goes out of business?

TAYLOR CONRAD: That's tough to say. I mean, this-- the model that they have was an amazing idea during the pandemic when everyone wanted to stay at home and keep out of contact with others. But as we have come back into a more normal life and normal way of buying things, it's hard to tell if that's holding up. And people, especially investors have lost interest in the company. We saw that drop in August of '21 after they hit their high.

And it's just been trailing down, few little looks back up. But it's definitely going to be hard for them to turn around.

- And so if they're not going to able to turn around, then what happens, Taylor? Is this a company that could potentially go out of business? Is it a situation where someone else could come in and buy them. Because as you said, the industry is kind of distressed here, right? It's not just Carvana. So what do you think happens in the next 12 months, say?

TAYLOR CONRAD: Well, I mean, that's really hard to say. The next few quarters are going to be crucial for Carvana. They just updated their operating plan in August. And their entire focus is going to be on raising the retail units sold and focusing on gross profit per unit. And part of that gross profit, that whole gross profit per unit is going to be how they're going to be able to purchase these cars. And right now, it's very hard for them to do that.

Because all the time we're seeing these used car prices drop. And so does Carvana want to purchase this price-- or this car this week at this price when next week, it may be down significantly. And then it's extremely difficult for them to make a profit on those cars.

- Taylor, does Carvana need to stop making these silly towers. It seems like a big capital expenditure for them that they don't need. Well, I think that was a thing that really drew people to them in the first place. It was interesting. It's kind of their thing. And you know, I actually just drove by one of these last week. There's 33 of them in the country. And the one I happened to drive by in Maryland was empty, unfortunately.

So it could be filled now, but in for how that looks for potential customers and for investors, that doesn't look great to have that entire showroom completely empty.

- Yeah, I would say so. I don't I, yeah, I don't think I've ever seen one empty. That is definitely--

- Not an empty vending machine.

- Not a good look.

- Not good for candy, not good for cars.

- Yeah, Taylor Conrad, thank you so much. Really interesting here as we all watch this company as it has been tumbling. Taylor Conrad of Argus, thanks.