Key Points: 

  • Carvana is likely to go bankrupt
  • They issued $1B in preferred shares 
  • Apolo bought $1.6B of their junk bond which was far less than they offered
  • Pre-Packaged Bankrupcty

Carvana Stock Analysis: A look into potential bankrupcty

 

Carvana has been a name that has made waves over the last years due, in major part, to the car vending machine gimmick. The company was technically out of cash on the November earnings last fall.

And regardless of their enormous sales revenue, they lost money. Even worse, they lost money during an era where used car prices were accelerating due to macro issues in the markets. However, it has been noted time and time again that Carvana always overbid for cars whether at auction or buying from private sellers.

The video above goes into detail – it’s 40 minutes long but worth the watch to figure things out. In situations like this the market is not technicals/price action driven which is important to understand. The company is structurally flawed by all accounts – and not just because it could go bankrupt but because the numbers don’t add up.

Sometimes trading and investing goes above price action or indicators and one needs to understand things like this. Now if you were in our SAT Options Course or trading Futures these things don’t matter.

The reason, specifically to the SAT Options course is this:

  • We teach a strategy that uses high beta stocks and ETFs to trade options on
  • Price action is the baseline driver of strategy

Event-Driven Trading on Carvana 

With Carvana, this is more of what would be described an event-driven trading strategy or theme. There are a lot of moving parts (as seen in the video) which makes it harder to trade. Usually, situations like this are meant for Special Situation or Event Driven hedge funds who have the capital to short and, ultimately, play the bankrupcty court strategies.

However, for those who are expanding their knowledge on investing in markets this is a fascinating case to look at because you can learn a lot about corporate structure, debt financing and how things play out when a company deceives the markets at large. Carvana did a very good job at this for many years it just took a while to see things play out.

Apolo Bails Them Out

One thing that was not mentioned in the Carvan Stock Analysis video was that Apolo group was the one who bought the Carvana junk bonds. Apolo is likely to get favorable terms for their junk bonds meaning they likely are what is called ‘first position’ in the capital structure.

The key to understand is this: that Junk bond is intended to purchase car auction firm ADESA. Now, whether they do that or keep the money for operations we will have to see. Regardless, what this looks like is what is called a pre-packaged bankruptcy. Meaning this: Apolo knows that Carvana is going to go bankrupt and the $1.5B junk bond purchase gives them creditors rights to assets when they go into the inevitable bankruptcy.

Pretty wild right?