CVNA – cars sold like online vending machines – is candy for Millennials. Basically, some folks don’t mind paying up for a better car buying experience and some investors think this could be a disruptive business model justifying its 3.5 times 2019 Sales (when the largest seller of used cars in the US, KMX, is 0.75 sales).
Despite CVNA’s stellar stock rise from $8 to $80 in 2 years, this ‘tech company’ has a lot wrong with it under the hood, including but not limited to being structurally unprofitable, fundamentally weak, debt-fueled and cash-incinerating.
Trading near all-time-highs, this unicorn (translation: crazy expensive stocks by valuation metrics but not on expected growth estimates) seems unstoppable compared to its peers KMX and AN, which primarily own their inventory and have physical stores, but in comparison to CVNA, are both profitable.
Comparing CVNA against a backdrop of subprime receivable problems in an environment of very high auto loan delinquency rates where the auto industry is in technical recession, it is no wonder short sellers have piled on. Add in its cash-burning operation and high insider-selling, and the most die-hard of short sellers will likely hold through even higher prices.
Having said that, CVNA is falling into the 80-20 rule for technical traders. Once a stock hits $80, which CVNA has, it is highly probable it will hit $100. After which, it’s anyone’s guess, but if I was a betting woman, I would expect a short squeeze above $85, pause at $93 before a push higher into the psychological $100 level before retreating – and possibly violently after its November 6th earnings report.
Finally, macro risks are growing as headwinds for this consumer play. Should recession fears pick up in earnest, increasing the likelihood of higher unemployment, this unicorn will be about as healthy as a vending machine candy bar.
This is usually the stuff I post only for clients, but since it was a public representation of my stock-specific equity analysis, I wanted to do a full disclosure.