The car market is mercifully cooling down. Cars are being built, enough that even GM has to temper Silverado production. Cars are getting cheaper, so now less folks are paying a dealer markup on new cars and less of a premium on used cars. All of this is hurting the struggling, debt-laden Carvana. And it only may get worse from here.
According to a report from Reuters, Carvana’s woes are only deepening, with its net losses increasing nine-fold according to a Thursday report from the company. The math as to why is fairly simple: Carvana purchased cars at an elevated rate during the heart of the COVID-19 pandemic, often offering vastly above normal values, spawning a trend of people cashing out and selling to Carvana. Some folks even flipped cars and made a profit by selling with the platform.
Because of this, Carvana has a big inventory problem. It purchased cars far above normal value at inflated rates, and now a portion of that investment is disappearing thanks to the car market softening significantly since the fourth quarter of 2022. It has tried to control its inventory problem, reducing its inventory by 27% overall, but is still facing a glut of cars it cannot sell at a profit.
Carvana’s popularity exploded during the frenzy of the pandemic car market. A fully online and touchless purchasing experience enticed buyers onto the platform, while its generous purchase offers allowed it to stockpile inventory. Now its business model is subtly shifting as new cars become more available. With interest rates rising to curb inflation, buyers are turning to used cars for more attractive financing offers.
Still, Carvana posted a fourth-quarter net loss of a whopping $806 million, massively increased from a loss of $89 million a year earlier. Its revenue fell 24% to $2.84 billion.
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