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There isn’t going to be a fire sale. Their margins per car are positive and have only contracted about 20%. The margin isn’t enough to sustain their business, b

There isn’t going to be a fire sale. Their margins per car are positive and have only contracted about 20%. The margin isn’t enough to sustain their business, but the cars are priced in line with the market. Worst case, they would restructure in chapter 11 and continue to operate retail as normal.

indymike 4y ago
> There isn’t going to be a fire sale. That depends on the interest to carry a car in inventory. Contracting margins plus increasing "floorplan" (what dealers call the line of credit they use to buy inventory) rates can be devastating.
- 1123581321 4y ago
  If they can’t carry their inventory, they’ll go to another retailer through wholesale auction or direct buy, and show up for sale elsewhere at market prices. Carvana even owns an auto auction chain, which they bought to secure access to inventory but now might use to preferentially liquidate.
  - indymike 4y ago
    If Carvana isn't moving cars fast enough and is trying to liquidate inventory, just who is going to buy them?
    - nradov 4y ago
      Every other used car dealer will buy them. The auto auction market is highly liquid. Buyers have money.
femto113 4y ago
The value of their inventory is plummeting and those margins will continue to contract for however long it takes the last couple of bubble years to work their way through the system. Maybe the brand would survive a bankruptcy, but the equity definitely won't, and the bondholders are going to take a serious haircut too.
- gopher_space 4y ago
  Pandemic quality builds of large, expensive internal combustion vehicles at a time of soaring gas prices, limited parts, and rising labor costs. Parting them out might make sense.
  - nradov 4y ago
    Is that a joke? Parting out cars is very labor intensive and only makes economic sense in limited circumstances. Outside the HN bubble, most US consumers still want internal combustion vehicles regardless of gas prices.
    - gopher_space 4y ago
      Just a tongue in cheek way of suggesting the vehicles are worth less than the sum of their parts. I don't know that there's a HN bubble. Devotion to ideology seems to be kept in check by people known for their work who'll occasionally come down off the mountain. what's the difference between a bubble and a point of view? Is my BoF meetup biased because we're sticking to certain subjects?
      - coding123 4y ago
        You're rich enough to be on here not working at Taco Bell. A taco bell employee wants a Tesla but will buy the ICE
rsj_hn 4y ago
> Worst case, they would restructure in chapter 11 and continue to operate retail as normal. The market need that Carvana met was reducing the hurdles of buying a used car for those people who generally don't buy used cars. The biggest hurdle is financing. The second biggest is fear of getting a lemon, which is why they have those inspections, guarantees of service and taking the vehicle back. The last hurdle was doing this from the convenience of your home and not dealing with car salesmen. All of these were things that could be done by others, but with more frictions, and Carvana was lowering the bar. In exchange for adding this value, they are able to charge a premium. That premium is not coming from expert selection of car inventory or buying the cars for less. Unfortunately the cost that carvana spends to provide these value adds exceeds the premium they can charge. That was true before their margins contracted, and it's even more true now. In fact, carvana is being squeezed like a sandwhich, as as their funding costs are going up even as the willingness of buyers to pay a premium for carvana services are declining, causing the gross margins to go down. Carvana's biggest cost is rising interest rates. They literally borrowed at 10% in order to extend 5% auto loans to their customers. This is the problem they are in. And there's nothing they can do about their funding costs - investors charge them a premium because it's not clear that carvana is going to be around. Declaring chapter 11 is not going to give them a lower cost of capital, so they will need to get rid of their fleet somehow. Now whether the fleet goes for a big discount to end consumers has nothing to do with Carvana, because odds are some middleman will buy the fleet, rather than having them do a going out of business sale. We are talking about billions in inventory - an alarming accumulation of inventory: https://www.macrotrends.net/stocks/charts/CVNA/carvana/inventory https://www.macrotrends.net/stocks/charts/CVNA/carvana/inven... At a higher interest rate, you need to move inventory more quickly, because you are effectively taking out a loan when you buy the car and pay for a warehouse in which it sits and does nothing. The cost of carrying that inventory is higher when rates go up. It is higher for carvana and for whomever buys the fleet. This applies to all inventory everywhere. So, don't look for special discounts from carvana, look in general for falling prices in the sector as a whole, as dealers and manufacturers continue to get squeezed by the twin rocks of rising interest rates and falling demand.
- 1123581321 4y ago
  Well summarized!

indymike 4y ago

> There isn’t going to be a fire sale. That depends on the interest to carry a car in inventory. Contracting margins plus increasing "floorplan" (what dealers call the line of credit they use to buy inventory) rates can be devastating.

1123581321 4y ago
If they can’t carry their inventory, they’ll go to another retailer through wholesale auction or direct buy, and show up for sale elsewhere at market prices. Carvana even owns an auto auction chain, which they bought to secure access to inventory but now might use to preferentially liquidate.
- indymike 4y ago
  If Carvana isn't moving cars fast enough and is trying to liquidate inventory, just who is going to buy them?
  - nradov 4y ago
    Every other used car dealer will buy them. The auto auction market is highly liquid. Buyers have money.

femto113 4y ago

The value of their inventory is plummeting and those margins will continue to contract for however long it takes the last couple of bubble years to work their way through the system. Maybe the brand would survive a bankruptcy, but the equity definitely won't, and the bondholders are going to take a serious haircut too.

gopher_space 4y ago
Pandemic quality builds of large, expensive internal combustion vehicles at a time of soaring gas prices, limited parts, and rising labor costs. Parting them out might make sense.
- nradov 4y ago
  Is that a joke? Parting out cars is very labor intensive and only makes economic sense in limited circumstances. Outside the HN bubble, most US consumers still want internal combustion vehicles regardless of gas prices.
  - gopher_space 4y ago
    Just a tongue in cheek way of suggesting the vehicles are worth less than the sum of their parts. I don't know that there's a HN bubble. Devotion to ideology seems to be kept in check by people known for their work who'll occasionally come down off the mountain. what's the difference between a bubble and a point of view? Is my BoF meetup biased because we're sticking to certain subjects?
    - coding123 4y ago
      You're rich enough to be on here not working at Taco Bell. A taco bell employee wants a Tesla but will buy the ICE

rsj_hn 4y ago

> Worst case, they would restructure in chapter 11 and continue to operate retail as normal. The market need that Carvana met was reducing the hurdles of buying a used car for those people who generally don't buy used cars. The biggest hurdle is financing. The second biggest is fear of getting a lemon, which is why they have those inspections, guarantees of service and taking the vehicle back. The last hurdle was doing this from the convenience of your home and not dealing with car salesmen. All of these were things that could be done by others, but with more frictions, and Carvana was lowering the bar. In exchange for adding this value, they are able to charge a premium. That premium is not coming from expert selection of car inventory or buying the cars for less. Unfortunately the cost that carvana spends to provide these value adds exceeds the premium they can charge. That was true before their margins contracted, and it's even more true now. In fact, carvana is being squeezed like a sandwhich, as as their funding costs are going up even as the willingness of buyers to pay a premium for carvana services are declining, causing the gross margins to go down. Carvana's biggest cost is rising interest rates. They literally borrowed at 10% in order to extend 5% auto loans to their customers. This is the problem they are in. And there's nothing they can do about their funding costs - investors charge them a premium because it's not clear that carvana is going to be around. Declaring chapter 11 is not going to give them a lower cost of capital, so they will need to get rid of their fleet somehow. Now whether the fleet goes for a big discount to end consumers has nothing to do with Carvana, because odds are some middleman will buy the fleet, rather than having them do a going out of business sale. We are talking about billions in inventory - an alarming accumulation of inventory: https://www.macrotrends.net/stocks/charts/CVNA/carvana/inventory https://www.macrotrends.net/stocks/charts/CVNA/carvana/inven... At a higher interest rate, you need to move inventory more quickly, because you are effectively taking out a loan when you buy the car and pay for a warehouse in which it sits and does nothing. The cost of carrying that inventory is higher when rates go up. It is higher for carvana and for whomever buys the fleet. This applies to all inventory everywhere. So, don't look for special discounts from carvana, look in general for falling prices in the sector as a whole, as dealers and manufacturers continue to get squeezed by the twin rocks of rising interest rates and falling demand.

1123581321 4y ago
Well summarized!