CVNA - Carvana's post-earnings pop viewed cautiously by analysts

2023-05-05 13:00:37 ET

Carvana’s ( NYSE: CVNA ) stock’s surge after a better than feared earnings print and projection of an adjusted EBITDA profit in Q2 is attracting wary reviews from sell-side analysts.

Shares of the Phoenix-based auto retailer ripped 27% higher in afternoon trading, moderating gains from an over 40% pop notched shortly after the market open, due to a surprisingly strong GPU report and the aforementioned profit forecast. Trading volume for the heavily-shorted stock also trended toward about 400% of the daily average near the midpoint of trading as well.

Yet, the earnings beat and boom for the share price was still viewed skeptically by many analysts appraising the quarterly result.

“We give CVNA credit for aggressively reducing its inventory (to better match sales) and reducing its cost base, while also making progress on other operational initiatives (e.g., logistics efficiency). However, we would not extrapolate the 1Q23 results and 2Q23 guidance to the future profitably run-rates due to a number of transient benefits,” Wedbush analyst Seth Basham told clients. For retail GPU, the expected boost from $1,000 ex the inventory valuation benefit in 1Q to a guided $2,000+ in 2Q is enormous and we believe is primarily driven by market pricing dynamics (retail vs. wholesale prices) that turned very favorable through 1Q and to start 2Q…Accordingly, we expect retail GPU to normalize to below $1,500 after 2Q.”

He added that cost-cuts are now “largely behind the company and its cost base is still too high for the current unit sales volume with significant excess fixed costs that the company is unwilling to cut.”  As such, continued momentum on profit improvement may be difficult, in his view, as he expects EBITDA to turn negative again by Q3.

“Ultimately, value for the equity is limited unless the company can continue to show a rapid improvement in profitability beyond 2Q23; as we believe this is unlikely, we continue to continue to rate CVNA Underperform,” Basham concluded.

While analysts at both DA Davidson and Needham Securities maintained Hold ratings as opposed to Wedbush’s Sell-equivalent, the question marks on reaching profitability were likewise in focus. As average selling prices for autos decline and demand drops for autos amid rising interest rates, analysts advised the company will be hard pressed to “shrink its way to profitability.”

“CVNA expressed confidence they can drive profitable growth post the operational changes they have put in place, but even with ~30% retail unit growth in '24 and a LSD adj. EBITDA margin we can only get to $400M in adj EBITDA, leaving minimal value for equity holders once bondholder obligations have been satisfied,” Needham analyst Chris Pierce concluded. “Even with the improved performance, CVNA's balance sheet is not supportive of $600M of annual

interest payments, likely driving CVNA's initial exchange offer which has now been extended twice, with bondholders countering with a dilutive debt for equity raise given the debt/equity mismatch at this time.”

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