Carvana and its investors seem to be getting a hold of the company’s troubles, according to JPMorgan.
Analyst Rajat Gupta upgraded shares of Carvana to neutral from underweight, saying that investors have a better handle on the risks around the used car seller after its decline this year, and that the company can better manage its liquidity.
“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,” Gupta wrote in a Tuesday note.
“Importantly, as we highlighted in our preview, carve-outs in their debt indentures allow for an additional ~$4bn+ of debt which can be borrowed on a secured basis. Clearly, these are not ideal outcomes and will be very expensive, but any progress demonstrated on tapping even a slice of the $2 bn in real estate, could temporarily shun concerns around liquidity and thus, survivability,” he added.
The analyst maintained his December 2022 price target of $20, which is roughly 48% upside from Monday’s closing price of $13.53. The stock jumped 9% in Tuesday premarket trading.
Carvana shares down more than 90% this year, and Gupta expects that the retailer is “not out of the woods” yet as it deals with rising interest rates and a poor macro backdrop for used car sales. He said he does not see a V-shaped recovery in the industry.
Still, Carvana will not deal with the same level of write-down risk like some of its peers such as CarMax, he said in the note.