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Carvana Not Out of the Woods on Fundamentals Despite JPMorgan Upgrade

Stock Markets Nov 01, 2022 10:40
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By Sam Boughedda

Carvana Co. (NYSE:CVNA) was raised to Neutral from Underweight, with its price target kept at $20 per share by JPMorgan on Tuesday.

Analysts there stated that while the company is not yet "out of the woods on fundamentals," its risks seem better understood.

"Since the KMX print, which started the recent leg of underperformance, shares are down -50% vs. our coverage down -5% and e-comm peers flat. Our conversations with investors continue to suggest a high degree of skepticism around CVNA's ability to fund the FCF burn through 2024, given elusive volume growth (hurts fixed cost leverage), skepticism around real estate liquidity and risks to finance GPU from widening Auto ABS spreads," explained the analysts.

However, they stated that survivability is not a reason to own Carvana shares, and JPMorgan believes the company is not yet out of trouble.

"Used car fundamentals remain weak (4Q is tracking to be another quarter of y/y unit declines with outperformance vs. industry narrowing further) and we don't see a V-shaped recovery in the industry, particularly given challenging supply dynamics in the medium-term for 1-5 yr old cars and negative equity risk," they added.

"We also believe hitting 2023 EBITDA positive targets are a stretch in most scenarios with both GPU and volume growth unlikely to accelerate at the same time. Worsening auto credit data points are clearly going to hurt CVNA's new loan origination margins (as lenders have become more competitive, most recently reinforced by COF), or likely come as the expense of volume in order maintain a quality book."

Carvana Not Out of the Woods on Fundamentals Despite JPMorgan Upgrade
 

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