Carvana's $450M Equity Follow-On: Why Now and How Did the Market React?
On Monday post-market close, Carvana announced plans to issue 5 million common shares, which would be worth about $440 million based on the latest close price of $88.91 (Tuesday). Carvana’s stock dropped 10% on the announcement day from $98.59 to $88.91 (Monday to Tuesday close), a larger margin than expected dilution, indicating investors are not as bullish on this equity raise as the previous ones. Carvana is not profitable today, and lost $360 million in 2019.
The equity raise announcement comes at the peak of the recent Carvana stock roller coaster, which hit bottom at ~$30 in Mid-March in the early days of the pandemic, and climbed back to over $100 by May 8. The upward stock trend closely mirrors US auto sales as a whole, which reached a trough at the end of March, but sales have recovered for six straight weeks since then. Also on Tuesday, Carvana competitor Vroom announced it filed for a $100 million IPO, making it a busy week for the online used car dealers.
Carvana’s rationale to issue now is to capitalize on its very strong stock price and secure what it considers a favorable source of financing. Carvana’s other main source of financing is its “floor plan facility”, a debt facility with Ally Financial that is backed by Carvana’s vehicle inventory. As of March 31, Carvana had $740 million outstanding on the facility with a total capacity of $950 million. Carvana will use some of the capital from this equity raise to pay down the floor plan debt facility. In Carvana’s opinion, the small bit of dilution from this equity raise is a good trade-off for the relatively cheap capital infusion it will receive today to pad liquidity.
Carvana has raised $2.5 billion of funding from the capital markets over the years from a number of different debt and equity sources, not including financing from Ally Financial:
All of Carvana’s Capital Markets Transactions
Apr. 2017: $225 million IPO at $15.00 per share
Dec. 2017: $100 million convertible preferred stock, private placement
Apr. 2018: $350 million equity follow-on at $27.50 per share
Oct. 2019: $350 million 8.875% high yield bond notes
Mar. 2019: $365 million auto loan securitization
May 2019: $315 million equity follow-on at $65.00 per share
May 2019: $250 million 8.875% high yield bond notes
Mar. 2020: $600 million equity raise from existing shareholders at $45.00 per share
I don’t think anyone doubts Carvana’s amazing growth story will continue, but concerns lie in its speed to profitability and cash burn until then. The company’s liquidity requirements until reaching profitability is the biggest investor concern, a point that Morgan Stanley has honed in on. Because of this, there’s a very large short interest in the stock, over 35% of the public float is short, and that has contributed to a lot of the historical stock price volatility.
Carvana Bull Arguments
Revenue Growth. Carvana is the fastest growing public company across consumer, tech and retail, and has doubled revenue each year for the past 6 years.
Consistently Increasing Gross Profit per Unit (GPU). Carvana’s GPU growth is an important piece of the story in the path to profitability. The company has grown GPU from $200 in 2015 to $2,850 per car in 2019. Continued growth will be driven by cheaper financing, add-on service revenues and buying more cars from customers.
Profitable in Mature Markets. Carvana looks at its business on a per market basis. It is profitable in its oldest market of Atlanta, proving it has a formula for success over time.
Carvana Bear Arguments
Sources of Liquidity. Liquidity is the main concern of investors. Carvana has given mixed signals to the market on when and why it will raise capital, saying that each time is the last capital raise before hitting profitability. This has led to confusion and uncertainty.
Increasing Competition from CarMax. Market leader CarMax, Carvana's largest competitor, has started offering completely online car buying options in competitive markets like Atlanta, leading to investor concerns in these markets.
DriveTime and Ernie II Involvement. Carvana was spun out from a business called DriveTime, owned by Ernie Garcia II (father of Carvana CEO Ernie Garcia III), and affiliated companies currently provide financing to Carvana.
Do you think now is a good time to invest in Carvana? Let me know your thoughts.
Carvana is the largest online used car dealer in the US. Founded in 2012 and based in Tempe Arizona, Carvana’s (NYSE: CVNA) mission is to change the way people buy cars. By removing the traditional dealership infrastructure and replacing it with technology and exceptional customer service, Carvana offers consumers an intuitive and convenient online car buying and financing platform. Carvana.com enables consumers to quickly and easily shop more than 20,000 vehicles, finance, trade-in or sell their current vehicle to Carvana, sign contracts, and schedule as-soon-as-next-day delivery or pickup at one of Carvana’s patented, automated Car Vending Machines.
About the Author
Bonnie Young runs the Amplified blog. She shares her insights on market trends and interviews founders that are shaking up the tech scene. Please reach out to her on LinkedIn with your questions and feedback.