Carvana’s (NYSE:CVNA) recent Q2 results were greeted enthusiastically by investors with further sheen added by the company’s attendant announcement of a debt restructuring deal. In fact, in complete contrast to the evisceration of the shares during the latter part of 2021 and throughout 2022, the stock is up by 829% this year.
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The pleasing Q2 results and debt deal are indicative of a company moving away from troubled times, says Morgan Stanley analyst Adam Jonas. That said, there’s a caveat that goes alongside some well-deserved applause.
“Carvana management deserves credit for executing on cost saving and taking decisive action to provide significant financial breathing room with relatively little dilution to equity holders,” Jonas explained. “However, significant challenges remain with respect to the used car consumer and the viability of CVNA’s long term business model. Even considering our expectation of continued recovery in the business and less bearish views on the used car market, the stock’s reward-skew and 20% downside to PT move us to Underweight.”
The 20% downside Jonas refers to is based on a significantly improved price target from the MS analyst, which jumps from $12 to $35. Yet, it is still some distance below the current price and the reason why the rating drops from Equal-weight (i.e., Neutral) to Underweight (i.e. Sell). (To watch Jonas’s track record, click here)
Could Jonas be wrong? That depends. He is of the opinion that the present share price already factors in the successful implementation of the rest of the restructuring strategy, which includes a transition back to growth. Jonas also notes that Carvana has demonstrated its ability to substantially improve its cash management while “shrinking its footprint.” However, the company now faces the challenge of proving its capability to achieve operational efficiency and generate positive free cash flow while simultaneously expanding the business once more.
“Showing execution along these lines, in addition to proving a higher sustained retail GPU, would likely result in scenarios where the stock price remains higher than our revised up $35 PT and could prove contra to our Underweight rating,” he summed up.
Overall, 3 other analysts join Jonas in the bear camp, one remains a fully-fledged bull, but with an additional 12 analysts staying on the sidelines, the stock claims a Hold consensus rating. Most, however, agree the shares are overvalued; the $37.69 average target forecasts ~14% decline in the months ahead. (See Carvana 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.
