Carvana Co., Freshpet Inc. and Peloton Interactive Inc. could feel the cash burn as the Fed raises interest rates, according to independent equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, warns that time is running out for cash-burning companies kept afloat with easy access to capital.
“As the Fed raises interest rates and ends quantitative easing, access to cheap capital is drying up quickly,” writes New Constructs CEO David Trainer, in a research note released Thursday. “At the same time, many companies face declining margins and may be forced to default on interest payments without the possibility of refinancing.”
As so-called zombie companies run out of the cash needed to stay afloat, risk premiums will rise across the market, according to New Constructs. This, in turn could further squeeze liquidity and create an escalating series of corporate defaults.
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Specifically, Trainer highlights Carvana’s
“dwindling cash supply, intense competition and elevated valuation,” which put the stock in danger of declining to $0 a share.
“Carvana has failed to generate positive free cash flow in any year since going public in 2017,” he added. “Since 2016, Carvana has burned through $8.3 billion in FCF (free cash flow).”
Shares of the used-car retailer have plunged 88% in 2022 amid downgrades and losses, surpassing the S&P 500’s SPX 20.5% decline. In April Carvana reported wider-than-expected first-quarter losses, citing a “uniquely difficult environment.” Last month Carvana also announced plans to lay off more than a tenth of its staff.
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