Hey everyone Me: Kevin here. Well, it looks like Carvana might be carduna or car bankrupt Or just bankrupt. So the first thing that I did when I started seeing some of the stories about Carvana potentially going under is of course I Immediately thought about Open Door because their balance sheet looks terrible, their expenses are terrible and like we do in our course member live streams on almost a daily basis. I Go right to the balance sheet.

The balance sheet and the cash flow statement are the two statements that are most critical. Obviously, income statement helps for understanding net loss. But let me give you a little bit of an idea of what's going on here. So I Consolidated this already.

This is a company that has about 500 million dollars in unrestricted cash and and I'm just rounding some of these numbers. Doing this on the go here. they have about two and a half billion dollars of cars. The problem is, they're selling their cars for barely a profit.

In fact, when you jump over to their income statement, you could see that they've never been profitable as a business. However, they do generate a gross profit when they sell their vehicles. So for example, in the three months ended September 30th, they were able to bring bring in about 359 million dollars in gross income That is basically cars sold minus cars bought. So they were able to generate a gross profit of 359 million dollars.

The problem is just their SG A So selling General and administrative expenses were 656 million dollars in the last quarter. On top of that, they paid 153 million dollars in interest. That works out to 1.7 million dollars a day in interest that they're throwing away. Uh, plus some other expenses of about 58 million dollars.

Basically, the last quarter, they lost about half of a billion dollars 508 million dollars to be exact. But last year, during the used car boom where there was a shortage of used carbs, but these cars were selling for substantial, substantially large values, the company was still losing money. On a nine-month basis, they lost 100 million dollars, and on a three-month basis, ending in Q3, they lost 60 million dollars. So they haven't been profitable over the last two years, and the nine months ended this year, they lost almost one and a half billion dollars.

Now, they've been offsetting a lot of that with stock based comp. so not real cash expenses when you have stock based comp. But it's still an expense of the business, right? And instead, they've been financing in just the last three months. Their financing activities helped them generate three billion dollars of cash, and in the nine months compared to 2021, they generated about 1.8 billion dollars in debt.

So needless to say, this is a company that's not surviving because they're actually operating a profitable business. They're surviving because they're borrowing, which in a recession is really, really bad. Because what happens, interest rates go up, and so lo and behold, when you add up the debts, you look and you see, Oh my gosh, they have 1.9 billion dollars in current liabilities. That means money that's due within the next 12 months.

1.9 billion dollars. And and I mean talk about deadlines like look, we know on Friday We have a coupon code expiring coupon code PP for the amazing programs on building your wealth where we do this kind of fundamental analysis in our live streams almost every single day, which is phenomenal. But we look at this: we go 1.9 billion dollars due. Within the next 12 months, you have 500 million in cash.

so maybe you've got three months of a run rate. Given that last quarter, you lost about 500 million dollars in cash. Oh sorry, that was over the nine month period because of all their borrowing. Either way, their net loss was well in excess of that.

Uh, their net loss was about 508 million, but their their cash expense was a little less because of stock based comp. But anyway, the point is, we've got 500 million dollars in unrestricted cash 2.5 billion dollars in cars. so they need to sell about 70 of the cars that they have in inventory ASAP just to be able to satisfy their current debts of 1.9 million dollars. But on top of that, they have an additional 6.6 billion dollars in extra long term liabilities.

This is a company that is so heavily upside down with an unprofitable business model. and so what's happening today? Well, not only do you have an analyst who cut the price target for Carvana to one dollar, but you have Wed Bush who, uh, completely unrecommended the company. They remove their recommendation for the company and that has that in addition to what I'm about to tell you has led the stock. Diplomat About 30.

Today, it's already been down like 95 percent from its all-time highs, which is insane that you could still lose 30 percent after you're already down 95. But that's the way math works out. Anyway, listen to this: Carvana stock plunged to a record low on Wednesday after the group or I should say a group of its debt holders debt holders holding about 70 percent of the outstanding debt formed a cooperation pact. So here's how this works: when a business is about to go into bankruptcy, usually in bankruptcy.

Corps The creditors the the people who are owed debt fight over the leftover assets are like, no, we'll take these cars, We'll take these computers, we'll liquidate that, we'll take that, and we'll try to pay our debt back. But the problem is, these are all unsecured so they're not in like a particular order of who's owed what. And these are companies. These are.

These are massive companies like Uh Apollo Global Management BlackRock Pimco These are huge institutions that hold some of this debt and they've formed a packed Uh representing about four billion dollars of outstanding debt. and they're agreeing to negotiate together in the event that Carvana goes into bankruptcy. Well, news of this pact is sending the market freaking out because all of a sudden now people are realizing oh my gosh, that means Carvana is about to go bankrupt And not only do we have news about this potential pact, but oh, and I did want to mention it was oh, it was actually Wed Bush that did end up lowering their price Target from nine dollars to one dollar. So I wanted to clarify who that was.

it was also them. They removed their recommendation, recommendation, set them to underperform, and set their price Target to a dollar. But in addition to that, right after we got information that they were or that a pact was being formed for the outstanding debt, we hear now from Bloomberg that Carvana is Consulting with lawyers and investment bankers about options for managing its debt. That's in other words, the precursor for chapter 11 bankruptcy.

Because when these kinds of companies start going to advisors at law firms, it's because they're sitting down going. All right. Do we have the ability to continue operations? Do we just liquidate? Go with the chapter seven, Or do we go with like, a chapter 11 or 13 and do some form of restructuring bankruptcy because there's no way we're going to be able to get rid of this like 8.8 billion dollars in liabilities. We're we're screwed and I want to be clear about that.

That's about 1.9 in current and then another 6.6 in long term. That works out to about what is that? 8.5 billion in long-term liabilities. Again, they've got assets of about two and a half of vehicle inventory. but if they have to Discount that inventory another 10, then they really only have 2.25 of inventory right? Terrible situation to be in.

This honestly reads exactly like open Door I think Open Door is going to be closed door next. but this if you want to see what a company looks like that's going bankrupt like Revlon went bankrupt that tried to meme stock because people thought it was going to be a Hertz I did a course member live stream and I'm like do not in like this is a hot potato don't go anywhere near this hashtag not personal financial advice I am a financial advisor I am a licensed financial advisor but obviously I don't know, you're a circumstance chances so I can't give you personal financial advice I sell courses on building your wealth and I run an ETF but again, I can't give you personal financial advice and you can learn more about all that in the links down below. But uh, folks, this is a company that does not have pricing power. You have no PP here.

PP Very, very small. You don't have pricing power because you're subject to the whims of of what's almost a commodity. a used car. Now, used cars technically are not a commodity, but you're subject to the whims of the used car market.

And if all of a sudden new cars are slashing their prices or getting disinflation in new cars that pushes down used cars. obviously. and now we're starting to get a glut of used cars, people can't Finance new cars because the people who could have financed new cars already got new cars during the pandemic when rates were low. Now the only people that I'm hearing anecdotally that are walking into car dealerships or people with subprime credit scores, They walk in, they say things like yeah, I got a 750 credit score and then their credit gets run and they got like a 550 and they can't qualify for anything.

You know their interest rate goes from maybe a prime credit score of a seven percent interest rate on a car to like a 12 percent event. and then they can't qualify to buy anything they're they're if anything, they'd have to downgrade from the from the clunker they have. Now it's it's terrible. It's a terrible situation.

But again, if you want to look at companies and see what balance sheets look like when companies start going bankrupt, you look at Revlon you look at Open Door which I think is the next victim to fall on this. And you look at Carvana here. It's just a completely terrible balance sheet. In addition to that I Want you to think about what this is going to do? The Federal Reserve right? The Federal Reserve does not intend for people to lose their jobs.

They don't intend for people to go bankrupt. But when the Federal Reserve forces a recession, that's the side effect. That's the consequence. And the Federal Reserve looks at this and goes and says, you know what this means.

Our interest rate hikes are working. This is how we start on the path of disinflation. We get rid of the froth, we get rid of the excess, and people have to go bankrupt. Companies have to go bankrupt.

People have to lose their jobs. There are plenty of other jobs available. so a bad company goes bankrupt and the other people go get a job somewhere else. I Know that's easier said than done, but that's just the view of the Federal Reserve And it's a difficult period of time.

But this is the kind of stuff that's going to help lead us to a distance. Inflationary environment. Remember, disinflation means less inflation, but it could even turn into a deflationary environment. which is actually the opposite of inflation is where prices are actually going down rather than just rising at a slower rate.

Just to visualize that for a moment, this is what, like inflation is, is prices going up right? Disinflation means prices are still going up, but they're going up at a slower slope if you can. Kind of visualize that, right? That's disinflation from this. And then of course, this is disinflation from that right. Deflation is when prices actually go down.

So uh, this, this is a contributor to that. But but uh, this is a you know look. The used car business has not been one that you've wanted to be in for a very long time. Uh, for during the excess during the euphoric period.

Shift I Believed made a great investment. but I did make it very clear that I about probably about 18 months ago at this point that I don't believe. It makes sense to be in a used car business when there's actually a shortage of cars. Now we have a lot of cars now.

we're in the opposite position, right? But you don't have any pricing power now. But then when you have a shortage of cars, the other problem and this could have been Carvana's issues last year as well. When you have a shortage of vehicles to sell, a company that makes money on the transaction like Carvana or Shift is not going to do well. And so this is why.

And I've mentioned this in dozens of live streams. Anyone who was paying attention knows I've been out of shift for a very very long time. It's because anytime you have a transaction based business, you're going to see transaction Revenue decline when there's a shortage. Guess what's going to happen next year? I Believe Looking forward, there are going to be thousands of real estate agents who not only leave the industry, but companies like Redfin and Expi.

While they could go up because the ocean of the stock market might rise next year, you're probably going to see these companies report terrible transaction revenues because they're going to be fewer home sales. It's the same thing in cars, so it's very, very logical. You you really want to focus on on companies with PP Pricing power. Open Door Carvana are not that any used car seller is not that a real estate agent based business is not that.

I Actually really strongly believe and I've maintained this belief all year long that companies like the chip manufacturers all have bottomed um, not earlier in the year they started bottoming in the summer and have really gotten closer to their bottom. Uh, in the summer to now chip manufacturers have pricing power and they're probably their bottoming process and and companies uh I Know it sounds ironic to say it now, but it I Still, the thesis has not changed for Tesla Bentley's terrible Miss Uh, on on forecast for Chinese Sales is just an indicator of what's happening with Tesla So anyway, these are my thoughts. Let me know what you think in the comments down below. We'll see the next one.

Thanks Goodbye!.