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Carvana stock tanks after Wedbush warns of bankruptcy risk

Yahoo Finance Live anchors discuss a Wedbush analyst’s note downgrading Carvana stock to Underperform from Neutral.

Video Transcript

JULIE HYMAN: Let's talk about some movers that we're watching this morning ahead of the opening bell. Carvana tops the list and then some. It's down by 36% this morning. A Wedbush analyst cutting his recommendation on the online used car retailer to underperform from neutral and slashing the price target on the company to-- from $9 to a Street low of just a dollar. It's really what's in this note that is sending the shares down to such a degree, saying that there could be a bankruptcy restructuring of the company, and if that happened, that the equity would be worthless, potentially, potentially.

That is a-- now there's a higher likelihood of this because there have been some negotiations with lenders here. According to Bloomberg reporting last night, the largest creditors of the company, Apollo Global and PIMCO, signed a new agreement to negotiate with the company. And so that apparently has raised some alarms here about what that signals.

BRIAN SOZZI: And of course, you mentioned, of course, Apollo is the parent company of Yahoo, but this is now Carvana, I would say, the most hated stock in the entire market. This is probably looking like a real fundamental train wreck next year. Debt restructuring, continued losses, and it boils down to this-- can they raise capital next year to keep their business going? And if they do, what do the interest rates look like on the business, which is clearly not operating where it was two years ago during the pandemic?

BRAD SMITH: Well, we were just talking about it. It's a business that has become really good at trying to make sure that it's servicing its consumers by giving away money for your car, by making sure that any type of that customer experience that typically would knock on a brand elsewhere or a larger distributor or a dealership, they've tried to course correct for that. And that experience has cost them, too.

There's also the customer acquisition cost. There's, of course, a time now where consumers are pulling back on the number of used car purchases that they're making, too. And that's coming off of some of the used vehicle sales that we saw in 2021 that had actually risen by about 10% when compared with 2020, where people had more favorable terms as well for their financing.

JULIE HYMAN: And just to dig-- I just want to dig into what's going on currently with the company. So the company has about $4 billion of debt that is controlled by these entities. It's not just Apollo and PIMCO, by the way. There are other creditors that have also banded together. This agreement, according to Bloomberg, lasts three months and essentially would allow them to negotiate with each other and with the company so that you don't see sort of a splintering of obligations in the event that there is some kind of restructuring event.

BRIAN SOZZI: Which is super negative for Carvana.

JULIE HYMAN: Correct.

BRIAN SOZZI: Super negative.

JULIE HYMAN: Exactly. And so, again, this implies that they're-- the credit is distressed. Right now, the company's bonds, its debt outstanding trading below $0.50 on the dollar, which implies that investors believe that there is going to be a default on the debt, i.e. some kind of bankruptcy proceeding.

One interesting thing that Wedbush points out is that the company does have $2 billion worth of real estate that it owns. And so that that would be its sort of easiest readily available source of capital if it decides to start selling off assets.

BRIAN SOZZI: It's all those giant vending machines they've been opening with--

JULIE HYMAN: They need space for those.

BRIAN SOZZI: They need space for them, but obviously, the winner here-- winners here will likely be an AutoNation and a CarMax, too. Obviously, they're the more established auto sellers in this country. So if Carvana goes away, I mean, that's a big-- a lot of market share left up for grabs.

JULIE HYMAN: Well, and could the winners also be car shoppers, right? Because if you have all this inventory that is then going to be coming to market through different vendors, maybe they're going to be-- I don't know-- more-- to get it off their lots, maybe they're going to have better prices. We just heard--

BRIAN SOZZI: Higher sale prices.

JULIE HYMAN: Maybe. I mean, we just heard Seth Carpenter talking about that already, we've started to see used car prices come down. Does this-- I don't entirely understand all of the dynamics, but does it suggest-- one question I ask, does it suggest that we could see further pressure on used car prices?

BRAD SMITH: Well, the pricing has to normalize. And for the normalization of used car prices, that's also going to bring, hopefully, a wave of consumers that have been sitting on the sidelines and saying, I could just get a new vehicle at this point, unless there's something that's really compelling in the used car market for me to go after aggressively right now.

BRIAN SOZZI: And [INAUDIBLE] Wedbush noting right at the top of their headline, bankruptcy risk rising, pretty much is all.

JULIE HYMAN: What's your target-- what's your target vehicle that [INAUDIBLE]?

BRAD SMITH: My target vehicle, I would love to just get back in my 2014 CLA Mercedes.

BRIAN SOZZI: Oh, nice.

BRAD SMITH: Yeah.