Carvana: A Cautionary Tale for Zombie Companies (NYSE:CVNA)

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When year-end reports often analyze which companies are likely to file for bankruptcy protection, retailers, industry names and some underdogs in legacy industries are often highlighted. However, prospects for 2023 seem more focused The growth-at-all-costs paradigm in some of the technology and market’s youngest companies is giving way to a return to focus on profitability.

Carvana (NYSE:CVNA) may be the best cautionary tale in this regard. Once a market darling, the stock’s nearly 99% decline over the past year has accelerated even further as investors doubt that hotly anticipated gains won’t come. Now, a united group of creditors is circling the battered company, waiting for an opportunity to pick up its corpse.

However, the Arizona-based online auto retailer isn’t the only growth stock that could see its stock fall sharply in 2022. Going into 2023, interest rates are likely to continue rising, and this may not be the last time. One is bankruptcy.

Dissolution cycle

While Amazon has undoubtedly changed modern life in many ways, its impact on investor psychology has been significant. The company’s ability to sustain losses and grow into a powerhouse over the years has provided a lifeline to cash-losing businesses that have been more reluctant than ever to pursue cash-burning practices in recent years.

In many cases, an attractive end market or innovative idea can be enough to get private and public equity investors to pour money into companies. Billions of dollars in metaverse projects, co-working spaces, and other innovative ideas have fueled this trend, pushing many “zombie companies” by 2023.

However, as investors scrutinize profits more closely, betting on growth or future big moonshots in attractive markets is not practical right now.

“Investors have beaten growth in an all-costs mentality,” Modulus Global CEO Richard Gardner told SeekingAlpha. “We’re heading into a significant recession, and the VC dollars we had a year ago are gone. The name of the game is simple: save money and survive.

He cited the recent pushback against cash-burning meta-platforms as indicative of current investor sentiment. For companies that are already strapped for cash, the survival aspect can be a bit more difficult.

In fact, companies like Meat Beyond (Meat) are consistently cash-burning companies that post consistent quarterly lossesPint), Peloton Interactive (PTON), hearing (CHWY), Wayfair (W) and Robinhood markets (HOOD) faces an uphill climb to turn around profitability after a laser focus on market share and product expansion. Each of the relatively young companies has indicated they will pursue cost-cutting measures to survive, but layoffs and belt-tightening can only go so far.

For debt collectors called Karvana (CVNA) growth via M&A on its own terms, the adverse impact on the stock is likely to increase. According to the Swiss Re Institute, if macro conditions continue to deteriorate, many will face bankruptcy.

“In a severe recession scenario, a higher yield default rate of 15% than last seen during the global financial crisis is possible. This comes as companies face weak demand amid a high interest rate environment, leaving zombie companies more exposed,” the Swiss reinsurer said. “Despite the potential for large financial losses, profits Unprofitable companies should be allowed to default. Keeping them alive will only delay the inevitable.

Integration cycle

Beyond the cash burn problems and planned “liquidation cycle” that Carvana brought to the fore, its efforts to disrupt a highly competitive industry offer useful lessons.

Carvana (CVNACompeted with traditional automakers such as Lithia Motors (boy), Autonation (A) and Group 1 Automotive (GBI), as well as relatively well-capitalized online competitors such as CarMax (KMX) and troubled upstarts like VroomVRM) In short, the field was a crowd.

However, the crowded nature of automobile retail compares to the level of competition arising in the automotive industry, particularly in terms of EV manufacturers. Seeking to follow in Tesla’s footsteps, Rivian Automotive (RIVN), Lucid Motors (LCID), Fisker (FSR), Kano (GOEV), Faraday Future Intelligent Electric (FFIE), Mullen Automotive (MULN), pole Star (PSNY), Lordstown Motors (riding), visit SA (ARVL), Nicola (NKLA), REE Automotive (REE), Hyson Motors (HYZN), Archimoto (FUV), the Workhorse Group (WKHS), and many more have come to popularize the EV manufacturing space.

The bankruptcy of Electric Last Mile and its subsequent acquisition by Mullen Automotive is unlikely to be the last such liquidation event in the space. Deep partners for Rivian at Amazon, Cano at Walmart and Polestar at Geely, others without such leverage. As many of these companies struggle to chart a path to profitability, the market may soon lose patience with less successful players, thinning the EV herd. This is especially so as traditional automakers push more aggressively into the EV space.

Just as zombie companies in e-commerce and tech are being liquidated, the crowded EV space may at least be due for consolidation.

“However, bankruptcy is not the only option for zombie companies. They can sell assets, and this can be an opportunity for healthy companies,” says a recent Harvard Business Review. Report recommended. “Private equity firms aren’t the only ones eyeing companies struggling to sell businesses; If interest rates rise quickly over the next year, companies with a lot of cash or the ability to raise cash will be able to buy less.