Carvana Co. (NYSE: CVNA), the popular online marketplace for buying and selling used cars, experienced a remarkable surge this week, with its shares soaring by as much as 38%. This significant increase can be attributed to two key factors: an upgrade in its credit ratings for auto loan securitizations and the launch of a new nationwide advertising campaign.
Investors have interpreted these developments as positive signs for Carvana. The company was previously facing the possibility of bankruptcy at the start of 2023. As of the latest update, Carvana shares have risen by an impressive 33% this week and an astonishing 240% year-to-date.
Carvana operates by buying and selling used cars through its online marketplace, facilitating transactions between consumers and wholesale purchasers. When customers purchase a car from Carvana, the company provides them with an automotive loan. Unlike traditional methods, Carvana does not retain these loans on its balance sheet. Instead, it packages and sells them to third-party financiers.
In recent quarters, concerns had arisen regarding the credit quality of Carvana’s loan securitizations, leading S&P Global to downgrade its credit ratings. Although underperforming loans would not have an immediate impact on Carvana, they could potentially strain the company’s relationship with its financing partners. This relationship is a critical aspect of Carvana’s business model.
Fortunately, it appears that these concerns were exaggerated. Carvana announced this week that S&P Global has upgraded the credit ratings on 21 classes of Carvana loan securitizations. In addition, the rating agency maintained its rating on 19 other classes, indicating that the loans are performing better than previously anticipated.
This is fantastic news for both the automotive market and Carvana. It suggests that the company’s business model is in a healthier state than earlier predictions.
In addition, Carvana has unveiled a national advertising campaign aimed at attracting more consumers to its platform. Earlier this year, the company was facing liquidity issues and implementing cost-cutting measures. The decision to launch an expensive advertising campaign suggests that Carvana is shifting from a defensive stance to an offensive one.
While a potential turnaround is on the horizon for Carvana, the company still has substantial progress to make. Over the past 12 months, it has experienced a cash flow deficit exceeding $1 billion. It is crucial for Carvana to swiftly attain positive cash flow to avoid depleting its available funds.
The recent positive developments indicate a step in the right direction. However, investors should closely monitor changes in Carvana’s income statement in the coming quarters to confirm the long-awaited financial improvements.