Just a month into 2023 and shares of Carvana (NYSE:CVNA) are up by a hefty 108%. Those are indeed some impressive returns, but only tell a small part of the story. Zoom out, and even after those recent gains, you are looking at a stock that over the past year has still shaved off 94% of its value.
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The used car dealer’s troubles have been well-documented. A massive debt load, declining vehicle sales with the losses piling up against a backdrop of a softening economy have brought about talks of potential bankruptcy to the fore, a possibility given credence toward the end of last year when it emerged that ten of its largest lenders – who collectively account for nearly $4 billion of the company’s unsecured debt – decided to join forces over potential restructuring talks with the firm.
Nevertheless, the new year has seen a shift in the stock’s fortunes so far, with JMP’s Nicholas Jones attributing the gains to a “decreasing 10-year yield and improving sentiment around a soft economic landing in 2023.”
Sentiment might have shifted, but due to the normalization taking place within the retail auto industry, when the company reports fourth quarter earnings on February 23, Jones believes most investors are “likely expecting a meaningful decline in retail units.”
So does Jones, who believes 4Q22 retail units are set to miss by ~8%, falling 23% year-over-year. Key items for investors to look out for when the company delivers the quarter’s financials include, “(1) gross profit per unit; (2) commentary around 1Q23 unit trends and ASPs; (3) additional cost-cutting measures, beyond announced RIFs (reduction in force); and (4) an update on potential debt restructuring to mitigate bankruptcy fears.”
On the latter, Jones has some good news for investors. “According to our analysis,” he says, “we do not believe CVNA is likely to run out of cash and face bankruptcy, assuming it can enter land sale lease agreements on its properties.
In fact, Jones thinks that should the company properly navigate cash flow worries over the near term, there could be “material upside to shares in 2H23.”
All in all, Jones thinks the stock has some way to go, and by some way, we mean 57% of upside. Those are the returns investors are looking at, should the stock make it all the way to Jones’ $15 price target. No need to add, the analyst’s rating is an Outperform (i.e., Buy). (To watch Jones’ track record, click here)
Jones’ prognosis is definitely the Street’s most upbeat; all in all, the stock claims a Hold consensus rating based on 16 Holds, 2 Sells and 1 Buy. At $8.96, the average target implies 6% downside from current levels. (See Carvana stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
