Why Aren’t Carvana’s Low Q2 Earnings Causing Their Share Prices to Drop?
Find out why, despite massive reported losses in Q2, Carvana’s share prices are holding somewhat steady.
Written by Jason Crosby
Reviewed by Kathleen Flear
The past couple of years has been intensely difficult for businesses and consumers alike. So while it’s not necessarily a surprise that Carvana’s Q2 earnings were low, it’s a sign that the
car market is suffering
—not just Carvana. But what is surprising is that Carvana’s share prices have remained largely steady. Why? Most people believe that the struggles the car market sees right now will pass within the next year.
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Seeking Alpha
points out that, compared to Q2 of 2021, Carvana’s
share prices fell from a gross profit per unit (GPU) of $3,368 to $1,752. That means there’s no mistaking that the company has been seeing smaller revenue numbers this year, but since their drop, they’ve remained relatively stable. Carvana lost around $1 billion in the first half of 2022. As a way to calm down investors, a shareholder letter from Carvana pointed out that “The used vehicle industry continues to face high used vehicle prices, rising interest rates, and other macroeconomic pressures,” among other key statements.
The letter goes on to emphasize that they believe the company’s hardships will pass as the car market and supply chain continue to readjust. After the letter was distributed, the company’s shares rose 10%, seeming to stop share prices from dropping. What does Carvana plan to do to dig itself out of a hole?
What does Carvana’s financial recovery plan entail?
The Wall Street Journal
indicates that Carvana’s financial recovery plan involves expense reduction. The company cut 125 employees from its workforce and has concentrated its efforts on eliminating unnecessary spending at all major business junctures. They hope by slashing spending on employees, shipping, administrative services, and more, that they’ll be able to raise their gross profit per unit share value up to $4,000—more than doubling where it was at the beginning of August of 2022.
The slight dip in car values plays into the company’s favor, but with inflation at a 40-year high, Carvana still has to wait for consumer demand to catch back up to high car prices.
Carvana’s loans may be the company’s saving grace
Instead of focusing on the sales of used cars as a central source of revenue over the next year, the company plans to prioritize its loan-purchasing services to customers instead.
Carvana has partnered with Ally Financial Inc., a lending company based out of Detroit, Michigan. Together, they plan to sell up to $5 billion of Carvana-originated loans through March 2023.
While it sounds like a slam dunk, in the past, the company has made investors hesitant to trust Carvana’s ability to collect debts on non-prime loans—loans made to consumers with negative credit.
MORE: Don’t Fear the Car Dealer: 8 Tips for Buying a Car
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