Investors of used-car retailer Carvana (NYSE:CVNA) are, without a doubt, looking for any piece of positive news. Perhaps they were relieved to hear that Carvana is using a strategy to potentially protect its assets. Yet, CVNA stock investors shouldn’t celebrate and might consider selling their shares, as Carvana’s problems haven’t gone away.
It’s one thing to take a tiny position in Carvana shares just as a lottery ticket play. Who knows — maybe there will be a meme-stock rally this year.
For serious, long-term investors, however, the bullish thesis for Carvana doesn’t hold up. Given the online automotive retailer’s fiscal issues, the most sensible move today is to cut and run, and never look back.
Carvana Has Severe Financial Problems
It’s not Carvana’s fault, of course, that inflation accelerated in 2022 and the Federal Reserve’s interest rate hikes discouraged borrowing and lending activity. Yet, Carvana still has to deal with these ongoing headwinds, and the company’s finances are in terrible shape today.
You may recall the report that Carvana hired a financial adviser in December. Also, the company’s creditors agreed, as a defensive move, to work together if Carvana attempts to borrow new money in order to raise capital.
CVNA stock plunged in the wake of those alarming developments. Yet, some investors remain hopeful today. They shouldn’t be too optimistic, though, as Carvana still reportedly has more than $7 billion worth of debt. Furthermore, Carvana’s fourth-quarter 2022 retail sales are expected to decline to around 86,000 vehicles, versus 113,000 in the year-earlier quarter.
Poison Pill Position Doesn’t Add Real Value to CVNA Stock
Again, Carvana’s long-term investors are surely looking for some positive piece of news to boost their spirits. Some of them bought shares of CVNA stock after the company adopted what’s commonly known as a poison pill strategy. However, this strategy doesn’t fix Carvana’s aforementioned financial issues.
Carvana called it a “shareholder rights plan,” but really it’s just a poison pill plan. With this strategy, Carvana seeks to protect its net operating loss carryforwards (NOLs) and other tax attributes. This “Tax Asset Preservation Plan” will trigger if an investor obtains a Carvana share stake of 4.9% or greater.
Oppenheimer analyst Brian Nagel opined that Carvana’s plan appears “largely standard.” Moreover, the analyst stated it’s a further reminder of the “ongoing fundamental struggles at the company and a now seemingly depressed share price.”
I tend to concur with Nagel’s assessment. The poison pill strategy doesn’t magically negate Carvana’s debt burden or its weak vehicle sales.
So, Is CVNA Stock a Buy or Sell?
Carvana’s company-specific financial problems haven’t vanished. Nor have the macroeconomic challenges of high inflation and elevated interest rates.
Therefore, CVNA is definitely a sell in my book. It’s fine to trade in and out of a minuscule position for a potential short-squeeze play, but long-term investors would be wise to cut their positions in Carvana.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.