Carvana, the company famous for its car vending machines, continues to give us one heck of a ride. It wasn’t long ago that people were throwing around the word “bankruptcy” and now the stock is up 338% in a year— and a mind-blowing 3,270% since the start of 2023. Yes, you read that right. If you had tossed $1,000 into Carvana when it was basically flatlining, you’d be sitting on almost $34,000 right now. 

But before we get too carried away with shooting off the confetti cannons, let’s talk about the big ol’ elephant in the room— beneath the hood of this comeback lies a $4 billion ticking time bomb that could have investors running for the exits.

First, let’s rewind. Not too long ago, Carvana (once known as the Amazon of used cars) was teetering on the brink of collapse. The company was buried in debt after its acquisition of the ADESA auction platform, and it looked like it was time to pull the plug. 

But, in what felt like a last-minute Hail Mary, Carvana’s leadership restructured the debt, trimmed interest payments, and extended deadlines, giving the company some much-needed breathing room. The result? Investors got excited about car vending machines again, and the stock started to take off.

Then there’s the financial cleanup. 2022 wasn’t exactly kind to Carvana. They saw a 3% drop in volume and racked up a massive $2.9 billion net loss. Fast forward to 2023, and while revenue and sales figures still took a hit, Carvana went into full survival mode. They slashed costs, and their income statement started looking a whole lot better. They even posted positive earnings in the first two quarters of 2024. Sure, the profits are tiny, but in a market where expectations were rock-bottom, even a flicker of good news is enough to make stocks go wild.

Here’s where things get messy: Enter Ally Financial. Carvana has a cozy relationship with Ally, who buys most of Carvana’s auto loans (about $4 billion worth, to be exact). This partnership has been crucial for Carvana’s revenue. But now, Ally is having a bit of a meltdown with loan delinquencies. In fact, their CFO said loans that are 61+ days past due are piling up. Ally’s stock took a plunge and it’s making investors in Ally and Carvana a little queasy.

Carvana’s deal with Ally is “non-recourse,” meaning Carvana isn’t technically responsible for those bad loans. But if Ally keeps feeling the pain, they might come knocking for better terms—or worse, they could stop buying Carvana’s loans altogether. That leaves Carvana with two not-so-great options: either hold onto these risky loans (yikes) or find someone else willing to buy them (double yikes). Neither of these is going to help Carvana sleep better at night, especially with a mountain of debt still looming.

Speaking of debt, let’s talk numbers. Carvana is sitting on $5.4 billion in long-term debt. While they’ve managed to reduce their interest payments (for now), the clock is ticking. Sure, they posted $415 million in free cash flow in the first half of 2024, but if they’d actually paid their debt interest in cash instead of kicking the can down the road, that number would have dropped to just $130 million. That’s not a lot of wiggle room when you’ve got billions hanging over your head.

And let’s not forget the ripple effect of Ally’s delinquency problem. If more of Carvana’s buyers start defaulting on loans, Ally could pull back. That means fewer sales, less revenue, and a much harder time paying down all that debt. It’s not exactly the ideal scenario for a company trying to make a comeback.

So, where does that leave us? For now, Carvana’s stock is cruising along nicely, but you can almost hear the warning light about to start flashing on the dashboard. 

The partnership with Ally has been crucial for Carvana’s recovery, but if Ally tightens the screws or decides to bail, we could see Carvana’s revenue take a serious hit. And with that $5.4 billion debt not going anywhere soon, they really don’t have much room for error.

P.S. I won't sugar coat this, but if you haven't been paying attention, we are on the brink of what many are calling the next cycle of a raging bull market, and with our last alert skyrocketing up 53% last week - our next alert TODAY could be the one trade that kicks this whole cycle off. Now I won't go to much into the specifics, but here's the thing, we've successfully predicted up to 16 triple-digit (100% or more) opportunities nearly every single week for the past four months... and the one we are eyeing today is set to be one of the most storied setups of the year. Meaning, if you haven't done so yet, I'd highly suggest clicking here ASAP and joining the 2,000+ Stocks.News Premium Members.

Stock.News has positions in Carvana, Amazon, and Ally.