Carvana: Vroom Puts This Into Perspective
- Vroom is debt-free, growing fast, and being priced at approximately 2.0x sales.
- In comparison, Carvana is fully weighted down by its highly restrictive balance sheet, slower growth rates than Vroom, and priced at approximately 1.9x.
- Carvana's shareholder are going to struggle to find a reasonable return in this stock.
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Carvana (NYSE:CVNA) is an expensive stock in a very competitive market. This has been known for some time, and investors have been willing to give the stock a wide pass.
Meanwhile, Vroom's recent IPO highlights just how expensive Carnava is why this stock should be avoided as it is unjustifiably expensive.
Further, going through Carvana's balance sheet, I question how long before Carvana needs to access capital markets once again?
Having said, I note that the strong momentum in the stock, from shorts being squeezed, is likely to keep the stock rallying here, at least over the very near-term.
Balance Sheet - A Position of Weakness
To say that Caravana's balance sheet has problems is to put things mildly. But even before digging around its balance sheet, we should consider its off-balance sheet entities:
Source: Q1 2020 10-Q
As we can see above, Caranava's off-balance sheet, has about $120 million in liabilities. This is not particularly onerous, particularly compared with a company like Hertz (HTZ). Having said that, Hertz has not been valued anywhere near $8 billion market cap for some time, and to argue that Caravana is not as bad as Hertz is not a compelling enough argument -- Hertz is on its way into potential bankruptcy.
Next, as to Caravana's balance sheet, Caravana has its Senior Notes, which mature in 2023 and amount to just over $600 million. Also, Caravana has drawn its revolver (including its Floor Plan Facility which matures in October 2020), with its total near-term revolver carried on its balance sheet at more than $800 million.
To summarize, Caravana is not operating from a position of flexibility and strength, but quite the opposite.
Capital Dilution -- a Second Take?
Moving on, Caravana has sold shares twice in the last several months, with its latest raise pushing its total number of shares outstanding to approximately 69 million -- a 47% dilution from the same time a year ago.
On its prospectus, Caravana has listed under use of proceeds:
Pending use of the net proceeds from this offering [go towards] pay[ing] down a portion of the borrowings outstanding under our vehicle inventory financing and security agreement with Ally Financial.
Accordingly, investors are being asked to pay a large premium for a company that has no tangible way to pay its creditors, as its sustainable cash flow is non-existent.
Indeed, a skeptical analyst could argue that its use of proceeds is phrased in a way to avoid drawing attention to the fact that its shareholders are paying its creditors.
Valuation - Irrelevant Until It Matters
In 2020, investors continue to obsess over two types of stock. Any company that is positioned as 'new economy/low touch', which Caravana fits into neatly. As well as, companies that are able to push the growth narrative. Accordingly, Caravana is well-positioned to push both narratives.
What's more, my back of the envelope calculations, imply that the stock is shorted approximately 40% (accounting for the recent equity raise). The figure may be out slightly, but it works for our purposes.
Given this high level of shorts, together with the market rallying strongly of late for all stocks, together this has forced Caravana's share to rally meaningfully since the lows set in March.
To put this into perspective, it implies that the bulk of shareholders are likely to be holding gains here, and not willing to pose tough questions from this underlying asset and its valuation.
In fact, on the surface, it appears that paying 1.9x trailing sales for Caravana is not excessive. However, it is more excessive than meets the eye, because of its competitor Vroom (VRM) is growing its ecommerce segment at 158% year-over-year, and is priced at just 2.0x total sales.
(Source): Vroom Prospectus
Indeed, not only is Vroom a strong competitor to Caravana but the segment where it goes head-to-head with Carvana is growing at a much stronger clip. Note that Vroom's TDA segment is a physical location segment in Houston, and not significant to the overall discussion here, so I've not focused on it, although I do discuss it here.
The Bottom Line
Vroom's IPO is a reminder, showing the disconnect in valuation between what a reasonable investor is willing to pay for a fast-growing debt-free company in this space, essentially, 2x total sales, versus Carvana's fully restrictive balance sheet.
Not to mention that Caravana's near-term is likely to meaningful slow down as the economy remains depressed.
In summary, investors are bidding for Carvana as if we are in 2019, and both its operations and the economy are in full swing, with the share price trading at close to all-time highs. Meanwhile, the underlying reality is actually very different.
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