While Morgan Stanley analysts note significant adjustments to their model to reflect stronger 2Q results, the surging valuation of Carvana Co (NYSE:CVNA) is leading them to downgrade the stock to a sell-equivalate rating.
The analysts downgraded the stock to Underweight from Equal Weight while raising his price target to $35 from $12. The new price target suggests about 21% downside from Wednesday's closing price.
They note the company took a crucial step towards self-financing, posting positive adj. EBITDA, exceeding retail GPUs expectations, and reducing SG&A expenses. The analysts add that to gain investor confidence, CVNA must maintain this progress, replicate 2Q improvements, ensure structural changes prevent negative operating leverage upon scaling, and address liquidity concerns with the debt restructuring.
That said, the analysts think the rally in the stock has gone too far, too fast.
"We think much of the rally is deserved but the stock has run well above our increased target driving a less favorable risk-reward vs. our coverage," they commented.
The analysts raised their bull case to $100 and bear case to $5. The bull case assumes a 25% revenue CAGR at a 10% EBITDA margin. Meanwhile, the bear case assumes CVNA grows at a 5% CAGR at a 6% EBITDA margin.