CVNA - Carvana rally stalls after JPMorgan turns bearish on the auto retail stock

2023-07-13 08:03:10 ET

Carvana Co. ( NYSE: CVNA ) fell in early trading on Thursday after JPMorgan downgraded the auto retailer to an Underweight rating from a prior stance of Neutral.

Analyst Rajat Gupta and his team believe the valuation on Carvana ( CVNA ) has once again disconnected materially from fundamentals. Gupta noted that the primary debate on CVNA shares over the last 9 months has been less about long-term business model fundamentals and more about liquidity and ability to buy duration through a potential recession and prolonged weakness in used cars. However, he noted that SG&A cuts have been substantial, used car pricing has been resilient, ABS spreads have improved, and as a result CVNA has managed to slow cash burn materially, even though at the expense of growth. With CVNA continuing to focus on cost and optimizing operations, Gupta continues to see above normal GPUs in the near-term with additional cost cuts likely to support EBITDA revisions. The catch is that current valuation, at an EV of ~$14B with implied EV/EBITDA of ~35x on FY25, is said to be baking in a stronger than anticipated return to growth and related operational leverage in 2024 and beyond.

Carvana ( CVNA ) is not expected to live up to those expectations due to a lack of thrust or support from the used car industry due to supply challenges, little prior comfort on SG&A leverage to bank on, risk of moderation in current GPU levels, which are being supported by lower volumes.

"We also do not believe that CVNA deciding to return to growth should serve as a catalyst for shares as consensus and investor expectations already assume double-digit unit growth CAGR in 2024E/2025E/2026E and focus is instead likely to be on pace and related unit economics trajectory to build comfort towards management’s LT unit and margin targets. While positioning and funding outcomes could still dictate near-term direction of shares and 2Q+3Q EBITDA estimates have the benefit of optics, we see valuation ultimately catching up to fundamentals and related forward earnings power."

Shares of Carvana ( CVNA ) were down 5.88% in premarket trading to end a hot streak that saw shares jump more than 50% in a week. Short interest on CVNA is at 63% of total float.

More on Carvana:

• Carvana jumps as short-sellers feel the pressure
• Top 10 most shorted stocks on Wall Street include Carvana, Beyond Meat, and more
• Bank of America pulls rating on Carvana amid elevated uncertainty

For further details see: