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Carvana falls as rising rates, inflation cut used car sales

FILE - A Carvana car retail "vending machine" and vehicle parking lot are seen from a drone in South Fayette, Pa., on March 15, 2021. Shares of the upstart used-vehicle chain tumbled another 16% on Monday, Nov. 7, 2022, undercut by the company's struggles with falling prices and waning demand for its products. (AP Photo/Ted Shaffrey, File) (Ted Shaffrey, Copyright 2021 The Associated Press. All rights reserved.)

DETROIT – Shares of upstart used-vehicle chain Carvana tumbled another 16% Monday, undercut by the company's struggles with falling prices and waning demand for its products.

The latest downturn comes after the shares fell almost 40% on Friday following Morgan Stanley analyst Adam Jonas's move to suspend his rating and price target for the company's stock.

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Carvana had been growing quickly as used car prices soared after the pandemic. But it has been caught in an environment where rising interest rates and high prices have sent many potential used car buyers to the sidelines. It reported a $283 million third-quarter net loss Thursday,

Jonas wrote in a note to investors Friday that Carvana's earnings revealed falling sales, higher expenses per vehicle sold, and a “material exhaustion" of cash.

“While the company is continuing to pursue cost cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment add material risk to the outlook,” he wrote.

Trading of the Phoenix-based company’s stock was briefly halted twice Monday morning as the price fell too quickly. Carvana stock is down almost 97% since the end of last year, closing Monday at $7.39.

Jessica Caldwell, executive director of insights for Edmunds.com, said the used-vehicle market is generally hit harder by rising interest rates and inflation. New-vehicle sales are usually more resilient because automakers subsidize lower-interest loans, she said.

“The slowing of the market is kind of the core issue,” Caldwell said. Some used-car dealers paid top dollar for late-model used vehicles, only to find that prices fell during the past few months, she said.

Plus, new-vehicle supplies, long crimped by a shortage of computer chips that cut production, are improving, drawing buyers away from higher-end used vehicles, she said.

U.S. used vehicle prices are about 30% higher than they were before the coronavirus pandemic began, and were around $31,000 on average in September. But the average price is down was down 1% from its May peak, according to Edmunds.

Carvana's third-quarter sales fell 8% and revenue was down 4%, the company said.

“Cars are an expensive, discretionary, often-financed purchase that inflated much more than other goods in the economy over the last couple years, and it is clearly having an impact on people’s purchasing decisions," CEO Ernie Garcia said last week.

The company, he told analysts after the earnings release, is on track with expense and operational efficiency goals, "but industry demand, interest rate and depreciation headwinds are slowing our progress and overall profitability.”

The used-car market is in transition, Edmunds' Caldwell said. Supplies, she said, will be limited in the future due to fewer cars coming off leases and fewer sales by rental car companies. She predicted that prices will start to level off but remain fairly high.

“They're going to get softer. They have to. But they're not necessarily going back to 2019 pricing,” she said.