Morgan Stanley analyst Adam Jonas downgraded shares of Carvana (NYSE:CVNA) to Equal Weight from Overweight with a $105.00 per share price target, down from $360.00.
The analyst urges Carvana to “take action to adjust its cost structure to remain a growing business.” Carvana must prioritize cost-cutting over growth, which makes a “challenging pivot for any growth company.”
Interestingly, Jonas’ move today comes just 2 months after he reiterated an Overweight rating on CVNA. Back then, when Carvana stock price traded at over $140 a share, Jonas said:
“We pound the table on CVNA right now and see it as offering one of the strongest bull/bear skews of any stock under our coverage. We understand why the stock has sold off so much from the highs. Expectations and multiples got ahead of itself during a highly volatile (if not unprecedented used car market). Over the past 18 months, Carvana experienced unusually high growth, in part due to changing consumer behavior during the pandemic. We think the market is too bearish on Carvana's long term growth, liquidity and the rationale of the ADESA acquisition. In our view, CVNA is a best-in class auto retailer, strong management, sufficient liquidity and institutional ballast. The set-up reminds us of Tesla in 2019.”
The analyst still believes CVNA is “a good company,” however he also sees “serious challenges” facing the business.
“By the company’s own admission, it had accelerated growth at precisely the wrong time into a consumer slowdown leaving a major mismatch between capacity and demand, creating a liquidity crunch. Of course, it’s always better to raise outside capital when you don’t ‘need it.’ In recent weeks, CVNA found itself in the position of raising capital at a time when they really needed it, coinciding with a challenging high yield market environment,” Jonas said in today’s note.
Finally, Jonas urges Carvana to consider addressing 4 key areas: 1) SG&A (advertising, logistics and other overhead costs), 2) capex (moving from expansionary to maintenance), 3) working capital (which comes with slower growth) and 4) improved GPU (being more selective to improve metal margins and reducing strain on the operations).
Carvana stock price is down 5.5% today to hit a fresh 2-year low.
By Senad Karaahmetovic