When the nicest thing a stock analyst can say about your stock is: “We’re pretty sure it won’t go bankrupt…” precisely how nervous should that make you feel? That’s a question that should be keeping Carvana (NYSE:CVNA) investors up at night.
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Unprofitable from the day it was born, with GAAP net losses growing as high as $870 million over the last 12 months, and negative free cash flow nearly three times as bad, used car vending machine Carvana has taken its shareholders for quite the joyride over its short time here on this Earth. From a share price in the low $20s two years before the Pandemic, to a towering height of more than $360 a share in the summer of 2021, Carvana has since skidded straight downhill — losing a staggering 96% of its market value over the past two years.
What’s ailing Carvana stock? It’s no great mystery. The company has $666 million in cash in the bank, is burning through cash at the rate of $2.4 billion a year (so that cash will last it about three-and-a-half months), and has amassed $8.1 billion in debt already. Bankruptcy is an entirely possible outcome of this scenario.
And yet, Carvana might not go bankrupt.
Indeed, it’s this “binary nature” of Carvana stock (i.e. it either will go bankrupt or it won’t) that encouraged Piper Sandler top analyst Alexander Potter (rated 5-star on TipRanks) to reiterate his “overweight” rating on Carvana stock, along with a $21 price target.
As the analyst explains, Carvana is on track to become a major player in the American used car market, and has the potential to capture 5% share of the market with total sales volume of 1.6 million cars by the 2030s (if it doesn’t go bankrupt first). To reach that point, the company must achieve positive earnings before interest, taxes, depreciation, and amortization (EBITDA) of 9.2% by 2025. But to reach that point, the company first must navigate two troubling trends.
First and foremost, there’s a recession on the way, at the same time as high car prices and still-high interest rates are already depressing demand for automobiles. Granted, this is an industry-wide problem, but Carvana is still part of the industry — and will share in the problem, in the form of slower sales growth.
At the same time, Potter points out, Carvana needs to cut its costs in order to get closer to profitability — but Potter thinks general and administrative spending is actually going up at the company in the near term. Thus, while management has promised “aggressive cost cutting measures,” says the analyst, “the proof is in the pudding.” Carvana has to execute, and show it can cut its costs enough to get itself to breakeven.
So what’s the upshot for investors here? According to Potter, Carvana is likely to lose money this year, and lose nearly as much money next year, finally breaking even only in 2025, on a GAAP operating income basis, and emerging into profitability in 2026. This means investors have three long years to wait, hoping nothing goes wrong to derail the company’s turnaround plan and force it into bankruptcy.
Carvana’s prospects don’t appear too favorable amongst other Wall Street’s analyst corps right now. Based on 12 Holds, 2 Buys and 2 Sells, the stock has a Hold consensus rating. The 12-month average price target stands at $8.85 marking ~20% downside from where the stock is currently trading. (See CVNA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
