Tuesday, January 31, 2023
HomeMarketCarvana Stock Catches Another Downgrade as Investors Flee

Carvana Stock Catches Another Downgrade as Investors Flee

Carvana likes to say it invented car vending machines.

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Mark Ralston/AFP via Getty Images

shares are reeling. Wall Street doesn’t see an opportunity in buying the beaten-up stock.

Tuesday, Oppenheimer analyst Brian Nagel downgraded shares of the online car seller (ticker: CVNA) to Hold from Buy.

“Significant nearer-term operational and financial risks” are the reasons for the downgrade. Nagel believes
still has a future, but is stepping to the sidelines for now.

He no longer has a price target for shares. His price target in September was $51.

Back then, shares were in the mid-20s and the average analyst price target was higher than Nagel’s, at about $56 a share. Despite the large implied gain, only about 38% of analysts covering the stock rated shares Buy, according to FactSet. Today, 33% rate shares Buy. The average Buy-rating ratio for stocks in the
S&P 500
is about 58%.

third-quarter earnings showed analysts had reason to be nervous. Sales fell to about $3.4 billion from $3.5 billion in the third quarter of 2021. Wall Street was looking for about $3.7 billion in sales.

Carvana shares dropped 39% after the earnings were disclosed, the latest grim development in a disastrous year for the stock. It closed at $9.74 on Monday, down about 96% so far this year and off about 98% from its 52-week high of more than $304 a share, set back in November 2021.

Along with declining sales, liquidity has become a concern for the Street. Carvana has between $6 billion and $7 billion in debt net of the cash on the balance sheet, according to FactSet. The company doesn’t have positive earnings before interest, depreciation, taxes and amortization, and Wall Street analysts’ financial models don’t show it producing positive Ebitda until 2025.

Debt to Ebitda is a common way analysts and investors measure how much debt is too much for most companies. Debt net of cash on the balance sheet for nonbank companies in the S&P 500 is less than two times, on average.

Carvana’s management seems to recognize the problem its balance sheet presents in a weakening used-car market. Back in August, as interest rates rose and demand for used cars weakened, Carvana set a new goal of generating positive free cash by cutting costs so the business can fund itself without the need for additional debt or equity capital.

Used car sales in the U.S. dropped roughly 13% year over year in the third quarter of 2022.

Cavana hasn’t reached its goals yet. The company used almost $200 million in cash beyond what the business generated in the third quarter. Wall Street doesn’t project full year positive free cash flow until 2026.

Things are getting tougher for used car dealers, including Carvana. Wall Street doesn’t see that changing soon.

Carvana stock was up 5% in premarket trading after the shares dropped 18% on Monday. S&P 500 and
Dow Jones Industrial Average
futures were up 0.8% and 0.5%, respectively.

Write to Al Root at allen.root@dowjones.com

Credit: marketwatch.com

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