RBC Capital Markets analyst Brad Erickson has issued a cautionary note on Carvana Co., downgrading the stock from sector perform to underperform. This downgrade comes amidst a remarkable rally that has seen Carvana’s shares surge almost 1,100% this year alone. In Wednesday’s session, the stock climbed by 40% following Carvana’s latest earnings report, as well as news of a deal with bondholders.
Concerns raised by Erickson center around the overvaluation of Carvana’s long-term margin improvements, which he believes may be excessively appreciated at this point. He also highlights the need for a swift return to growth to offset debt costs and substantial dilution. Additionally, Erickson suggests that an expanding debt load post-restructure is likely on the horizon.
Although Erickson has raised his price target for Carvana shares from $9 to $30, reflecting improved performance and reduced liquidity risks, he maintains his stance that the stock’s growth will eventually converge with more measured fundamentals over time. This convergence is expected to occur once near-term volatility settles.
Despite the downgrade, Carvana shares continue to climb, with an additional 3% increase post-downgrade.
Carvana’s Financial Standing and Analysts’ Views
Seth Basham of Wedbush Securities expressed his skepticism about Carvana’s prospects. However, he made an unusual adjustment to his price target, raising it from $1 to $40 (Carvana shares closed Wednesday at $55.80).
Basham believes that while Carvana now has some breathing room due to potential equity sales and a planned bond exchange in the next 20 days, the company must make significant improvements in unit economics for long-term viability and value for equity holders.
The majority of analysts, specifically 16 out of 23 tracked by FactSet, have chosen to remain on the sidelines with regards to Carvana shares. Sharon Zackfia from William Blair provided a measured perspective on the latest developments:
“All-in, the debt swap and equity offering are likely sufficient to help Carvana navigate through a challenging used-car market while addressing most concerns of insolvency.”
Zackfia expressed relief about Carvana’s enhanced financial position but maintained a market perform rating. She stressed that Carvana must achieve a return to top-line growth that justifies the stock’s premium valuation compared to CarMax Inc. shares, which currently stands at over 50%.
