As Carvana crashes hard, used car dealers — not buyers — stand to win big

• Used car retailer Carvana has come crashing down after a strong two years.
• Now, many are wondering if the company will go bankrupt.

After a blockbuster few years during the COVID-19 pandemic, Carvana has seen 98% of its market value evaporate and its stock plunge to just $4.81 as of Friday morning. The upstart used car retailer is fading so fast, many industry players are wondering what happens if it goes bust.

When global supply chain constraints hampered new production, shoppers pushed used car prices to record highs and Carvana's peak valuation to more than $60 billion. The retailer built up inventory as it scrambled to cash in on demand for its online model, which included home delivery.

Now that auto production has largely recovered, used car prices are at their lowest level since August 2021, according to Cox Automotive's latest index.

Carvana reported a Q3 loss of $508 million. It's undergone layoffs and has admitted to being too bullish on buying cars to sell so fast — cars that it had acquired at a premium but has since had to sell at lower prices.

"Nothing focuses us like difficulty," CEO Ernest Garcia told investors on a third-quarter earnings call in November, "and the last several quarters have undoubtedly been difficult."

Carvana's biggest group of bondholders, led by Apollo Global Management and Pacific Investment Management, are banding together in negotiations with the retailer over the restructuring of its debts, as first reported by Bloomberg. Together, they own about 70% of Carvana's unsecured debt, or $4 billion, according to the report.

The move would ensure Carvana can't play its creditors against one another as it has secured emergency financing.

What its mean for car buyers — and legacy dealers

Carvana vehicle buyers should feel relatively protected. Used car sales are governed by state laws, and even if the company files for bankruptcy, a court is likely to honor existing warranties, according to auto research firm Kelley Blue Book.

KBB cautions that car buyers should be sure to have the appropriate paperwork when it buys from Carvana, as Carvana has had a history of vehicle title issues brought on by its rapid expansion.

In the meantime, it's possible Carvana will "sell off some property, close some sales lots, and shutter some brightly-lit car vending machines," according to KBB. But don't expect a going out of business sale that floods the market with inventory anytime soon.

A bankruptcy, however, could leave car dealers pleased, as Carvana was able to undercut its brick-and-mortar competition with vehicle prices.