Carvana’s Debt Risk Threatens Meme Stock Surge

Online used-car retailer Carvana (NYSE: CVNA) has completed one of the most dramatic turnarounds in recent market history. Just two years ago, the company teetered on the edge of bankruptcy with $5 billion in debt and a stock price that had crashed 99% from its 2021 peak of $376 to below $5 per share. Rumors of Chapter 11 filings swirled as sales slumped and lawsuits piled up. Today, the narrative has flipped completely: CVNA’s stock has soared to $392 per share, up over 141% in 12 months and trading an incredible 8,150% above its level at the start of 2023.

This meteoric rise has been fueled by retail investor hype on platforms like Reddit and X, alongside a surprising recovery narrative from CEO Ernie Garcia III. The company’s second-quarter financials showed revenue growing 42% to a record $4.8 billion and profits of $308 million, up from $48 million a year earlier. With $11.9 billion in cash and equivalents and a market cap of $83.8 billion, Carvana has transformed from bankruptcy candidate to Wall Street enigma in record time.

Beneath the surface of this impressive turnaround story lies a potentially serious vulnerability. A recent Morningstar report analyzing an $851 million pool of subprime auto loans that Carvana bundled and sold to investors reveals alarming delinquency rates. The report shows that 28.7% of these loans to car buyers with lower credit scores are delinquent by at least 30 days, with 12.7% seriously overdue by more than 60 days. This means nearly one out of every three borrowers is struggling to make payments, up significantly from the 16% benchmark when the loans originated in 2022.

These older loans reflect Carvana’s aggressive 2022 lending spree, when the company handed out high-interest loans with annual percentage rates of 20% to risky buyers. Losses from repossessed cars in this pool total $29.9 million, or 3% of the total, though this is currently cushioned by a 27.9% buffer that helps maintain the debt’s investment-grade BBB rating. While this specific pool represents a relatively small portion of Carvana’s overall business, it serves as a warning sign about the quality of the company’s legacy lending practices.

The contrast between these deteriorating loan metrics and Carvana’s current financial performance creates a concerning disconnect. While the company’s recent results show strong operational improvement, the Morningstar data suggests that problems from its past lending decisions continue to simmer beneath the surface.

The critical question for investors is whether Carvana’s current buffers can withstand potential economic stress. The BBB-rated tranche of debt remains protected for now, but Morningstar’s analysis indicates that if delinquencies climb to 35% or losses hit 7-8% of the pool, that investment-grade rating could crumble. Such a development would likely spook investors and damage confidence in CVNA stock, potentially triggering a reassessment of the company’s entire turnaround narrative.

The Federal Reserve’s recent interest rate cuts present a double-edged sword for Carvana. On one hand, lower borrowing costs could ease pressure on subprime buyers and boost demand for used cars. On the other hand, if rates drop too quickly, used-car values could decline further (they’ve already softened this year), which would worsen losses on repossessed vehicles. This creates a delicate balancing act for the company as it navigates both macroeconomic conditions and its own legacy loan portfolio.

Analysts remain divided on Carvana’s prospects. Some believe the company’s substantial cash reserves ($11.9 billion) will cover any gaps from problematic loans, allowing for a soft landing. Others predict a potential stumble in 2026 if defaults surge, particularly if the United States economy enters a recession. The newer loan pools from 2025 show healthier metrics with delinquencies in the 5-10% range, suggesting Carvana has tightened its lending standards, but the legacy risks from 2022 continue to loom over the company’s recovery story.

For investors riding Carvana’s spectacular surge, the Morningstar report should serve as a yellow flag. The 28.7% delinquency rate in the 2022 loan pool—nearly double the original benchmark—indicates significant stress that could escalate under adverse economic conditions. While the current buffer provides protection, the vulnerability of the investment-grade tranche represents a potential catalyst for renewed market skepticism about Carvana’s sustainability.

The fundamental question remains whether Carvana’s operational turnaround can outpace the deterioration in its legacy loan portfolio. The company’s meme stock status has created tremendous volatility and investor enthusiasm, but underlying credit quality ultimately determines long-term viability. As the Federal Reserve’s policy evolves and used car market dynamics shift, Carvana investors face the challenge of separating hype from financial reality. The coming quarters will reveal whether this remarkable recovery story has staying power or whether the chickens from Carvana’s aggressive lending past finally come home to roost.