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Carvana Faces Downgrade From Piper Sandler Amidst Rally
Carvana's Recent Rally
Carvana's shares experienced a substantial increase of over 20% this week due to the company's strong second quarter results and its debt restructuring agreement. However, Piper Sandler believes that this rally may be coming to an end. While the company upgraded its price target to $48 from $29, which is just 2.7% above Thursday's closing price, analyst Alexander Potter downgraded Carvana's shares to neutral from overweight, citing concerns about the company's long-term prospects in the used vehicle market.
Piper Sandler's Long-Term Outlook
According to Piper Sandler, Carvana's recent success has brought the stock closer to a fair valuation. The company had previously been trading at a significant discount due to bankruptcy risk, which Potter believed to be unlikely. However, now that the bankruptcy scare has abated and the stock has risen to $47, Carvana is approaching a fair valuation. In order for the stock to continue to rise, there would need to be an upward revision to Carvana's long-term used vehicle market share expectations, which recent results do not support.
Potential Downsides for Carvana
Potter mentioned several downside risks to Carvana's growth, including the company's ability to maintain cost discipline at higher volumes, volatile vehicle pricing, regulatory changes, macro shocks, and high capital intensity. These factors could potentially impact Carvana's future performance and hinder its ability to sustain its current growth momentum.
Other Analyst Downgrades
Piper Sandler wasn't the only analyst to downgrade Carvana this week. RBC's Brad Erickson also lowered his rating on the stock to underperform from sector perform, stating that long-term margin improvements are likely already priced into the stock. As a result of the downgrades, Carvana's shares declined by 0.7% premarket on Friday, following a significant drop of over 16% during Thursday's trading session. Despite these recent fluctuations, the stock remains up by more than 880% year to date.
Conclusion: Assessing the Potential Impact on a New Business
The recent downgrade of Carvana by Piper Sandler amidst a significant rally raises important considerations for new businesses looking to enter the used vehicle market. While Carvana's shares experienced substantial growth due to strong financial results and a debt restructuring agreement, concerns about the company's long-term prospects have emerged.
Piper Sandler's analysis suggests that Carvana's recent success has brought the stock closer to a fair valuation. This indicates that the stock may have already priced in its potential for further growth, making it less attractive for investors seeking significant upside. Additionally, the mention of potential downsides, such as maintaining cost discipline, regulatory changes, and high capital intensity, highlights the challenges that new businesses in this market may face.
The downgrade by Piper Sandler, along with another downgrade by RBC, has resulted in a decline in Carvana's shares. This demonstrates that stock market sentiments can shift rapidly based on analyst assessments, impacting the performance of companies operating in the sector.
For new businesses considering entering the used vehicle market, it is vital to thoroughly evaluate the market landscape, including potential risks and competition. Understanding the industry dynamics and developing a robust strategy to overcome challenges will be crucial for long-term success. While Carvana's recent rally and subsequent downgrade provide valuable insights, each new business's circumstances and capabilities must be evaluated individually to make informed decisions and navigate the market effectively.
Article First Published at: https://www.cnbc.com/2023/07/21/used-car-seller-carvana-has-little-room-for-upside-says-piper-sandler.html