Carvana (NYSE:CVNA)
Carvana (NYSE:CVNA) stock fell as high as 5.6% in premarket trading on Friday before recovering from being down 1.9% at 10:55 a.m. ET.
The drop in Carvana stock price seems to have caused two factors: backhanded praise from JMP Securities and a price target cut at JP Morgan.
What’s the Reason?
First, we’ll look at what JMP Securities has to say (not to be confused with JPM). For Friday morning, TheFly.com reported that JMP analyst Nicholas Jones had lowered his price objective on Carvana stock, but only to $45 per share, or three times its current price. According to Jones, Carvana might fall short of third-quarter sales projections by as much as 7% when it releases results at the beginning of next month. Despite this, Jones asserts that the “substantial upside” exists in Carvana’s low stock price and that the firm is unlikely to go bankrupt.
Yes, you’re right. The b-word was among the words he used.
When experts on Wall Street start talking about the likelihood of a firm going bankrupt, even negatively, it’s usually not a good indication. Many investors were undoubtedly frightened by JMP’s analyst emphasizing that Carvana won’t go bankrupt because he felt compelled to say so.
JP Morgan’s announcement that it had dropped its price estimate on the used vehicle seller did not help, especially as JP Morgan’s new target price of $10 per share on Carvana stock is less than half of what JMP Securities believes Carvana would be worth.
So What Happens Now?
However, let’s revisit the insolvency issue. The investment bank JMP Partners has lowered its expectations for Carvana for the remainder of 2018 and through 2023 due to the company’s expected earnings loss in the next month. Furthermore, it reaffirmed that it believes Carvana’s likelihood of going bankrupt is minimal. But is that the case?
In all of its years as a publicly listed corporation, Carvana has never turned a profit. Contrarily, it lost $619 million in the prior year and had a negative free cash flow of $2.7 billion. If losses continue at the current pace, the company would exhaust its cash reserves of $1.4 billion over six months and still have $8.6 billion in debt to service.
While JMP may conclude that the danger of bankruptcy is “low,” it is clearly not zero. It’s reasonable for Carvana stock investors to be concerned.
Meta Description
On Friday morning, analysts at JMP Securities and JP Morgan cut their price targets for Carvana stock.
Featured Image – Megapixl © Viewimage
Author Shariq Khan 
