Hacker News Reader

Comment by wcunning | Hacker News Reader

This is less of a tech layoff story and more of an overlevered business with crashing asset values against very difficult short term liabilities and no ability to refinance in a rising interest rate market. The real question for normal people is if Carvana sells off a huge chunk of its inventory at fire-sale prices, does that accelerate the crash in used car prices? Is March of 2023 the right time to pick up that fun sports car since it'll be super affordable?

View on HN

There isn’t going to be a fire sale. Their margins per car are positive and have only contracted about 20%. The margin isn’t enough to sustain their business, but the cars are priced in line with the market. Worst case, they would restructure in chapter 11 and continue to operate retail as normal.

> There isn’t going to be a fire sale.

That depends on the interest to carry a car in inventory. Contracting margins plus increasing "floorplan" (what dealers call the line of credit they use to buy inventory) rates can be devastating.

If they can’t carry their inventory, they’ll go to another retailer through wholesale auction or direct buy, and show up for sale elsewhere at market prices. Carvana even owns an auto auction chain, which they bought to secure access to inventory but now might use to preferentially liquidate.

If Carvana isn't moving cars fast enough and is trying to liquidate inventory, just who is going to buy them?

Every other used car dealer will buy them. The auto auction market is highly liquid. Buyers have money.

The value of their inventory is plummeting and those margins will continue to contract for however long it takes the last couple of bubble years to work their way through the system. Maybe the brand would survive a bankruptcy, but the equity definitely won't, and the bondholders are going to take a serious haircut too.

Pandemic quality builds of large, expensive internal combustion vehicles at a time of soaring gas prices, limited parts, and rising labor costs.

Parting them out might make sense.

Is that a joke? Parting out cars is very labor intensive and only makes economic sense in limited circumstances. Outside the HN bubble, most US consumers still want internal combustion vehicles regardless of gas prices.

Just a tongue in cheek way of suggesting the vehicles are worth less than the sum of their parts.

I don't know that there's a HN bubble. Devotion to ideology seems to be kept in check by people known for their work who'll occasionally come down off the mountain.

what's the difference between a bubble and a point of view? Is my BoF meetup biased because we're sticking to certain subjects?

You're rich enough to be on here not working at Taco Bell. A taco bell employee wants a Tesla but will buy the ICE

> Worst case, they would restructure in chapter 11 and continue to operate retail as normal.

The market need that Carvana met was reducing the hurdles of buying a used car for those people who generally don't buy used cars. The biggest hurdle is financing. The second biggest is fear of getting a lemon, which is why they have those inspections, guarantees of service and taking the vehicle back. The last hurdle was doing this from the convenience of your home and not dealing with car salesmen. All of these were things that could be done by others, but with more frictions, and Carvana was lowering the bar.

In exchange for adding this value, they are able to charge a premium. That premium is not coming from expert selection of car inventory or buying the cars for less.

Unfortunately the cost that carvana spends to provide these value adds exceeds the premium they can charge. That was true before their margins contracted, and it's even more true now. In fact, carvana is being squeezed like a sandwhich, as as their funding costs are going up even as the willingness of buyers to pay a premium for carvana services are declining, causing the gross margins to go down.

Carvana's biggest cost is rising interest rates. They literally borrowed at 10% in order to extend 5% auto loans to their customers. This is the problem they are in. And there's nothing they can do about their funding costs - investors charge them a premium because it's not clear that carvana is going to be around. Declaring chapter 11 is not going to give them a lower cost of capital, so they will need to get rid of their fleet somehow.

Now whether the fleet goes for a big discount to end consumers has nothing to do with Carvana, because odds are some middleman will buy the fleet, rather than having them do a going out of business sale. We are talking about billions in inventory - an alarming accumulation of inventory:

https://www.macrotrends.net/stocks/charts/CVNA/carvana/inven...

At a higher interest rate, you need to move inventory more quickly, because you are effectively taking out a loan when you buy the car and pay for a warehouse in which it sits and does nothing. The cost of carrying that inventory is higher when rates go up. It is higher for carvana and for whomever buys the fleet. This applies to all inventory everywhere.

So, don't look for special discounts from carvana, look in general for falling prices in the sector as a whole, as dealers and manufacturers continue to get squeezed by the twin rocks of rising interest rates and falling demand.

Well summarized!

> They literally borrowed at 10% in order to extend 5% auto loans to their customers.

how could that possibly make any business sense to do?

Probably more like July.

It's going to take a long time for these loans to get liquidated, and then processed through the repo markets.

And likely the lenders will hold the repo'd asset longer if they can to not create a glut of vehicles. The way this really get's great for buying repo'd sports cars is if we get forced liquidations from the lenders.

It's going to be a bloodbath.

According to some video I saw on YouTube, there's already a large number of repossessed vehicles that banks are being very slow to release to the market, because they want to keep the prices high.

That's something that works when repossessions are still relatively low. Right now, most people are still employed and car payments are pretty high on the list of must pay bills, right behind mortgages. It's the same thing hedge funds do when taking or exiting a big position, move slowly to avoid spooking the market.

If someone like Carvana has to liquidate cars at a loss to keep the lights on, you're going to see a FLOOD of cars hit the market as you'll have a rapidly depreciating asset and nobody will want to hold.

If that was the case, why isn't the same thing happening to Carmax and Vroom and the other Carvana-style used-car dealers?

Used car prices are falling and I assume it would hurt all of them, but it seems to be hurting Carvana more than the others.

Not sure about Vroom, but carmax actually performs proper car inspections before purchase. They are not moving fast and breaking things.

Not sure about Vroom, but carmax actually performs proper car inspections before purchase.

Those CarMax inspections are so valuable that vultures patrol the parking lot, and if you leave without selling your car, they'll follow you home and make an offer on your car.

It happened to me. CarMax said the car was worth $8,500. I wanted to bring in my other car for an evaluation to decide which one to sell. A guy followed me to the grocery store across the street, approached me in the parking lot and started his pitch with, "I'll give you a thousand dollars more than whatever CarMax offered you."

I asked him if he wanted to look under the hood and take it for a test drive or anything, and he said he didn't need to, because CarMax had already done the hard work for him.

(My life situation changed shortly thereafter and I didn't end up selling either car.)

Haha. In Austin I hear radio ads from a chain dealer (Henna) where they promise to pay you $500 more than whatever Carmax appraised your car at.

Is there any evidence of this? I assumed they buy cars at wholesale auctions, maybe wash/clean them, and put them on sale, like any used car dealer does.

I have asked a couple of used car dealers (not CarMax specificially as there isn't one near here) if they do anything to these cars to prepare them for sale. They just laugh. The margins are not there to repair any problems, so what is the point of inspecting them?

Of course there is.

I detailed cars at a dealership and my friend detailed cars at carmax when we were young.

Used car dealers are bottom feeders in the car sales. They generally have crappier cars than big dealers. I'm sure there are exceptions. When I worked at one they did shady fixes and would never purchase car from one.

CarMax performs multi point inspection. They have their own detailers, paint and repair shops. CarMax knows exactly what they are doing and their business model is sustainable.

Purchasing cars ala carvana is insane. In the car groups people often talk about offloading cars with issues to carvana and them sending a tow truck to pick it up. Zero inspections.

I don't haven't been following CarMax, but CarLotz was another new entrant to the field that went public via an SPAC IPO in 2020 at a value of $1.9B that now has a market cap of around $24M. They are also trying to merge with Shift, which is in a similar state.

Noticing a trend in these "disruptors" in that they can't survive. I'm really not sure how CarMax and these other vendors are even being considered in the same category.

Pardon my ignorance, but why would used car prices necessarily impact a used car dealer? Surely these dealers have to pay more to buy these cars and so their margins should be unchanged? Or is the issue that they are buying used cars and prices are falling so fast that their margins are shrinking?

Because they need to keep the cars on their lots on their books. If car prices drop 25% they lost 25% of the value of their inventory.

Not that car values have crashed 25% or will.

I bet they will crash 25%. On the wholesale market, that might have already happened.

I was seeing 20-year-old Ford Rangers and Chevy S-10s with 200k miles listed on Craigslist for $10k a month ago. If you adjust for inflation that is actually more than they cost when they were new! Pick pretty much any make and model of car and you will see the same thing.

Even just from looking at Craigslist occasionally I have noticed a significant drop in prices for used vehicles in the past month.

They will lose money if used car prices drop because they will have to sell their inventory for less than they paid for it.

Supposedly Carvana went crazy and overbid everyone for cars sight unseen online. This massive inventory is now depreciating at full percentage points on a weekly basis with volume way down.

Maybe. Yes, the constrained supply caused a lot of people to overpay for cars, and the average monthly payment for a car surged over the last year. The deep sub prime folks will be struggling, especially as layoffs happen and people with no savings are stuck with a $700/m car payment. Repossessions have already started picking up, and there are reports of huge parking lots being filled with repo'd cars, and those cars failing to sell at auction. Obviously, if the big players can control supply enough, then I don't think there will be a fire sale. But it remains to be seen if they can accomplish that (I'd be surprised, I'll bet they'll have to liquidate and like you say, it'll all come crashing down). In any case, the Carvanas and Carmax type places, as well as unemployed consumers that have a big car payment on a soon-to-be-worth-a-whole-lot-less car are really in deep shit. Smells kind of like 2008, but this time with cars instead of houses.

Source: https://www.consumerfinance.gov/about-us/blog/market-monitor...

Any reason those cars wouldn't sell at the going (probably high) used car rate at the time? e.g. https://publish.manheim.com/content/dam/consulting/ManheimUs...

>Is March of 2023 the right time to pick up

I hope so. I've been without a car since just before lockdown in 2020, and it has been long enough (by some time now). It's just an insane time to buy a car, so the time without continues to extend. I might be able to survive another 6 months ;)

Yes.

This is less of a tech layoff story and more of an overlevered business with crashing asset values against very difficult short term liabilities

You say "potato," I say "potato."

Reply on news.ycombinator.com