Why Carvana stock dropped 97% in the past year as the auto resale success story became a used-car clunker

• Carvana's share price has taken a dive in just the last few days.
• The online used-car retailer has lost around half its value since reporting disappointing earnings on Thursday.

Not too long ago, Carvana was hailed as one of the great success stories of the pandemic era. But its fortunes have soured in 2022.

Shares in the online used-car retailer have plummeted by around 50% since it reported lackluster earnings on Thursday. And over the last year, 98% of the company's market value has evaporated.

So what gives?

Carvana's stock soared throughout much of 2020 and 2021, earning it a peak market valuation of more than $60 billion. Supply chain snarls kicked off a shortage of new cars that sent buyers to the used market in droves. The price of secondhand vehicles began to surge as a result. And during the scariest depths of the pandemic, Carvana offered a way for people to buy cars online and have them delivered to their homes.

But now the used-car market is slowing down, dealing a blow to Carvana and other dealership chains. On Thursday, Carvana reported disappointing sales and a hefty third-quarter loss of $508 million, sending its already faltering stock into a tailspin. This year, Carvana has lost $1.45 billion so far.

Carvana, known for its vehicle vending machines, chalked up the poor results to a challenging economy and slowing demand for used cars. The Federal Reserve's effort to curb inflation by raising interest rates has jacked up consumers' monthly payments and made vehicles even less affordable in recent months, the company said.

"Cars are extremely expensive, and they're extremely sensitive to interest rates," Ernie Garcia, Carvana's cofounder and CEO, said on a conference call with analysts.

According to Edmunds, the average monthly payment for a used car purchase hit $564 in October, up from $412 in January 2020. The average annual percentage rate on loans for used-car purchases hit 9.6%.

Carvana said it expects sales volumes and car prices to decline further in the fourth quarter. AutoNation, the largest dealership chain in the US, issued a similar warning about used-car prices last month. While lower prices may be a welcome development for buyers, it's a bad sign for retailers.

The current environment has some Wall Street analysts concerned for Carvana's future.

"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," Adam Jonas, an analyst at Morgan Stanley, wrote in a note to investors on Friday.

It's been a difficult year for Carvana.

In November 2021, the company said it had bought cars too fast to feed its explosive growth and was hitting operational snags in meeting customer demand. In April, the company acknowledged that ahead of the first quarter of 2022, it built up too much inventory and didn't anticipate a slowdown in sales due to higher interest rates, high car prices, and rising gas prices. It took on billions in debt to buy car-auction company Adesa in May in a financing deal that some analysts criticized.

In May, Carvana laid off around 2,500 employees in an effort to cut costs after multiple disappointing quarters.

The company is working to boost profitability, but its leadership acknowledged the long road ahead in a letter to shareholders on Thursday.

"The environment has continued to get increasingly difficult since the end of the quarter and it is probable things will continue to get more difficult before they get easier," they said.