Carvana (NYSE:CVNA) stock is resiliently in the green today, despite the publication of a short report by Kerrisdale Capital. As usual, the hedge fund has disclosed a short position in the underlying stock of its report.
“While many have shared concerns over Carvana’s business before, we voice ours at a time when shares have risen 165% in only a month on misguided optimism for profits that amount to little more than buffing the paint job on a totaled car,” said Kerrisdale.
The short seller starts off the report by mentioning that Carvana has $6.5 billion in total debt while simultaneously burning billions of dollars of investor capital in order to sustain sales growth. The used-car seller is unprofitable and even was during the pandemic, when the prices of used cars soared and interest rates remained low.
Kerrisdale Publishes Short Report on CVNA Stock
Kerrisdale notes that Carvana is ultimately a used-car seller, despite its technological improvements over other used-car sellers. That means that Carvana must compete in a crowded market with lows margins and a high need for capital.
Furthermore, the short seller believes Carvana made a major mistake last May after issuing billions of dollars of high-yield debt amid declining industry conditions. Kerrisdale points out that industry conditions have not improved since then. The short seller notes:
“Carvana’s aggressive cost cuts may succeed in slowing the rate of cash burn, but with over $700m in annual interest expense and capex, it simply cannot generate enough profit to stop the negative cash flow.”
By the fourth quarter, Kerrisdale estimates that Carvana will have to pay over $250 million in quarterly interest expense, which is also a period prone to seasonality. Meanwhile, the hedge fund also takes issue with the company’s pre-announced EBITDA figure for the second quarter, which was “better than expected.” Kerrisdale believes that the pre-announcement was misleading because the figure is due to significant one-time loan sales. The firm says the pre-announcement “reeks of pumping shares ahead of a potential equity offering.”
In conclusion, Kerrisdale characterizes CVNA stock as “worthless” while comparisons to other technology platforms and e-commerce platforms are “nonsensical.”
“We view the equity as a zero and investing at current levels is a worse deal than buying a clunker from a slick used car salesman.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
