JPMorgan analyst Rajat Gupta upgraded shares of Carvana from underweight to neutral on Tuesday, remarking that investors have a better understanding of the risk surrounding the used car retailer after its shares declined more than 90% this year. He added that the company can better manage its liquidity moving forward.
“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,” read a note from Gupta.
The note also said, “carve-outs in their debt indentures allow for an additional ~$4bn+ of debt which can be borrowed on a secured basis.” Gupta referred to those outcomes as not ideal and very expensive but noted that “any progress demonstrated on tapping even a slice of the $2 bn in real estate, could temporarily shun concerns around liquidity and thus, survivability.”
Gupta maintained his price target of $20 for December 2022. That price is roughly 48% upside from Monday’s closing price of $13.53.
Gupta said Carvana is “not out of the woods” yet as it faces rising interest rates and a shifting macro backdrop for the used car market. However, he noted that Carvana would deal with a different level of write-down risks than some competitors, such as CarMax.
Carvana shares jumped 9% in early trading on Tuesday following the announcement.
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