Carvana faces a tough 2023 as it burns cash

Yahoo Finance's Rick Newman explains why Carvana was voted Yahoo Finance's Worst Company of the Year after a tumultuous 2022 and the outlook for the stock and the used car marketplace's business model heading into 2023.

Video transcript

- Last week, we brought you Yahoo Finance's Company of the Year, which was Costco. And today, we're announcing the worst company of 2022, and that's Carvana. Now, despite a strong start to the year, Wall Street thinks this could be its last ride as bankruptcy fears escalate. Well, here to discuss is Yahoo Finance's senior columnist Rick Newman. This is not a title anyone wants to have.

RICK NEWMAN: Unfortunately not. When we do our Yahoo Finance Worst Company of the Year feature, we ask our audience to tell us what they think is the worst company of the year based on their experiences as investors and as consumers. So we got more than 5,000 responses this year. Carvana actually came in third. Meta and Tesla both got more votes for worst company of the year.

But Carvana is so much smaller than those other companies. And it got a lot of call outs from our audience who answered the survey. So we looked at what was going on there and decided based on what's happening at Carvana it was just a no brainer for worst company. The stock has lost 97% of its value this year. Just a year ago, this was considered a pandemic darling, as you said in the tease, Rachelle.

And what has happened this year has basically been two things. The company did not prepare itself for the turnaround in the used car market. Many analysts say it should have foreseen that higher interest rates were coming. That was going to hurt the used car market. And the second thing they did was make an acquisition in May that has turned out to require some pretty high interest rate payments on the debt they issued it to make that deal happen.

And they're just burning cash. So the company, it's not out of cash yet. There are worries that it will run out of cash. It still has some liquidity. But it's going to have a very tough time in 2023. So we'll see if Carvana is a public company at this time next year still operating business as normal or if it has to go through some kind of restructuring.

- And it was one of those things where, obviously, Carvana didn't prepare for what life was going to look like after the pandemic, that everyone wasn't just going to be buying their cars online. What else are you watching in the car space? I know that we're also looking at some moves by Rivian as well. But what stands out to you about Carvana's place in the auto industry as well?

RICK NEWMAN: So Carvana actually has a pretty interesting and perhaps very workable business model. I mean, the way Carvana works-- for people who haven't used it-- it's a used car online marketplace. You do not have to go to a used car dealer. And let's face it. Nobody likes to go to a used car dealer. It's a one price option. You select your vehicle online. And they either deliver it to you or you go to one of their so-called vending machines to pick it up.

So this actually is a good business. And there's no major player in this business. So it's not as if Carvana is trying to dethrone some giant. CarMax is the biggest player here. And CarMax only has 3.5% market share. So it would seem like there's a lot of room to move in here. And that's what Carvana says it's going to do. They say, look, many companies that have tried to disrupt an established marketplace have faced some struggles. Go back to the dotcom bust. I guess that's where the analogy is. And they say, we're going to emerge from this as a market leader. Rivian you just mentioned.

So Rivian is an electric car manufacturer. They make the cars instead of selling used cars. And they just announced that they are going to terminate a development deal with Mercedes-Benz in Europe. And if there's a recurring theme here, it looks as if what Rivian is doing is conserving cash. Rivian is in a better financial position than Carvana. Obviously, two different industries. These are not competitors. But Rivian, it's already selling one electric pickup truck and one electric SUV, but at very small margins. It's not making a profit yet. So it needs to conserve cash. So there's a lot going on in the car business these days. It's fascinating to watch and see whether some of these new business models can get traction and last for the long term.

- And I have to say, when it comes to haggling over cars, I'm one of those people. I like to be in person. I tend to wear them out before they wear me out.

RICK NEWMAN: You're a haggler?

- Absolutely. Absolutely. I like a deal.

RICK NEWMAN: OK. You're one of the few, Rachelle.

- One of the few. A big thank you to our very own Rick Newman.