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Last year was a huge wake-up call for many businesses, especially Carvana (NYSE: CVNA). Elevated inflation forced the Federal Reserve to rapidly hike interest rates, and it has created a softer macro environment that completely changed the company's prospects in a short amount of time. In fact, here is one important thing that Carvana's impressive rise and now pronounced struggles can teach investors.
Carvana (NYSE: CVNA) and Marathon Digital Holdings (NASDAQ: MARA) are two of the market's most heavily shorted stocks, with 71% and 35% of their outstanding shares being sold short, respectively, as of Feb. 27. Carvana's online sales of used cars slowed to a crawl as inflation curbed purchases of vehicles and rising rates discouraged customers from taking out new auto loans. Marathon Digital's Bitcoin (CRYPTO: BTC) mining business, which was built entirely on expanding its fleet of miners and mining more coins, struggled as the top cryptocurrency lost its value.
Whether you believe in Carvana's (NYSE: CVNA) potential or think it's doomed, most investors are aware it has a serious cash burn problem and that its growth has come to a crashing halt. Let's explain Carvana's interest expense problem and compare it to rival CarMax (NYSE: KMX), which has more than twice the debt but a small fraction of the interest expense concern. Let's first look at a graph that emphasizes not only how quickly Carvana's interest expense has soared but compares it to cash and cash equivalents and also shows why it's worse than it looks.