Carvana Stock (NYSE:CVNA)
The uptick in Carvana (NYSE:CVNA) shares after the company’s better-than-expected earnings print and forecast of an adjusted EBITDA profit in Q2, draws cautious assessments from sell-side analysts.
The car store headquartered in Phoenix saw its Carvana stock soar 27% in afternoon trade, down from a 40+% increase just after the market opened owing to the aforementioned excellent GPU report and profit prediction. Near the middle of trading, volume for the significantly shorted stock tended toward around 400% of the daily average.
However, many experts were suspicious of the quarterly performance, casting doubt on the earnings beat and subsequent share price rise.
Carvana has earned praise for its proactive approach to inventory management (by lowering it to better align with sales) and cost-cutting (by, for example, improving transportation efficiency). Wedbush analyst Seth Basham cautioned investors against extrapolating the 1Q23 performance and 2Q23 projections to future profitability run rates owing to several temporary perks. The market pricing factors (retail vs. wholesale prices) that went highly favorable through 1Q and into 2Q essentially drive the huge increase we anticipate in retail GPU from $1,000 ex the inventory valuation advantage in 1Q to a targeted $2,000+ in 2Q. As a result, after the second quarter, we anticipate retail GPU prices to return to a more reasonable level, much below $1,500.
According to him, the firm has “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.” Since he anticipates EBITDA to become negative again by Q3, sustaining profit improvement may prove challenging.
Since we don’t expect CVNA’s profitability to improve rapidly beyond 2Q23, we’ll keep our Underperform rating for the Carvana stock, as stated by Basham.
The doubts about making a profit were also a focal point for analysts at DA Davidson and Needham Securities, who maintained Hold recommendations instead of Wedbush’s Sell-equivalent. With falling average selling prices and falling demand for automobiles due to increasing borrowing rates, experts said the corporation would have a hard time “shrinking its way to profitability.”
Needham analyst Chris Pierce said, “CVNA expressed confidence they can drive profitable growth post the operational changes they have put in place.” However, “even with 30% retail unit growth in ’24 and an LSD adj. EBITDA margin, we can only get to $400M in adj EBITDA,” he added. This would leave “minimal value for equity holders” after meeting bondholder obligations. Given the current debt/equity mismatch, “even with the improved performance, CVNA’s balance sheet is not supportive of $600M of annual interest payments,” which is likely what prompted CVNA’s initial exchange offer, which has now been extended twice, with bondholders countering with a dilutive debt for equity raise.
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Author Shariq Khan 
