Carvana loses millions in Crash and Burn IPO

Carvana (Pending: CVNA) was off to a disappointing start with its valuation being cut almost by half after its first days on the market. The Phoenix-based online marketing company connects buyers and sellers of used cars.

Carvana is one of the more innovative of online used-car marketers in mainland USA. The company, unlike some of its competitors like Cars.com, acts not as a third-party that connects buyers and sellers, but as a buyer and seller in its right. Carvana operates by purchasing second-hand vehicles from their owners then refurbishing them. Once the cars are ready, Carvana will advertise them and sell directly to consumers. This Carvana modus operandi makes it easier for the company to control the pricing of its cars, which can go as high as even $20,000 apiece. A customer can either pick up his or her car or have it shipped to him or her a little as one day after purchase.

While such a business model makes Carvana the ideal business in every consumer’s mind, it makes investors wary of putting their cash into the company. This was evidenced by the significantly lower returns that Carvana experienced in its first issuance.

Carvana was initially seeking to sell off 15 million of its Stock A shares at a range of between $14 and $16 culminating to a $225 million revenue boost at the midpoint. The shares instead opened at $13.50 which was already below the range, before going to $12.87 during the day and closing at $11.10. The closing share price for the company gives it a $1.52 billion valuation, down from the $2.05 tag it had at IPO price.

So what went wrong?

One of the reasons cited by investors for not partaking in the IPO was that Carvana’s financial status did not give them a sense of assuredness when it came to making returns. This was especially evidenced by the company’s tendency towards losses in the past few years. In 2015, Carvana made a $36.8 million loss which spiked to$93.1 million in 2016. Before the IPO Company CEO, Ernie Garcia III noted that the trend was likely to continue for the next few months. Even the increase in revenue from 130.4 million in 2015 to 365 million in 2016 did not instil confidence in potential investors in light of Carvana’s losses.

Carvana also lost out in its IPO because investors were worried about the shadow of dilution of the common stock shares. Also, insiders with the type B stock shares had greater voting powers than those who took part in the IPO. Therefore, buying the type A shares may have seemed a bit on the losing out side.

The other reason that Carvana lost out had nothing to do with the company and everything to do with the market it operates in. The car industry is admittedly a large one, with about 542 in sales revenue all across the country. However, even the online vehicle retail businesses only cumulatively account for 7% of these sales. Even the potential for large-scale online sales cannot compete with the physical retail automobile businesses in the US.