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Carvana Stock Downgraded by Jefferies Amid Concerns of Overvaluation
Jefferies Downgrades Carvana Stock to Underperform
Jefferies, a global investment banking firm, has downgraded shares of Carvana, a secondary vehicle market stock, from hold to underperform. The firm also slashed its price target for Carvana to $30 from $55, indicating a potential downside of almost 32% from the stock's closing price on Friday.
Overestimation of Carvana's Profitability
Analyst John Colantuoni raised concerns about the overestimation of Carvana's profitability by Wall Street. Despite Carvana's impressive 830% surge in stock performance this year, Colantuoni believes that the higher profitability metrics are not sustainable in the long term. He argues that these metrics only reflect "transitory tailwinds" that will diminish in the upcoming quarters. Colantuoni specifically mentioned wider wholesale/retail spreads and the timing of loan sales as factors contributing to the temporary boost in gross profit per unit (GPU).
Anticipated Challenges for Carvana in the Future
Colantuoni further stated that Carvana may face difficulties and inefficiencies in the future due to an expected acceleration in unit growth. These challenges could have a negative impact on Carvana's per unit economics. Additionally, a pending company capital restructure aimed at reducing interest payment obligations could actually become a larger burden for Carvana down the road. Colantuoni estimates that deferring payments at a 13% payment-in-kind (PIK) interest rate would result in approximately $40 million in additional expenses for Carvana, starting in 2026.
In conclusion, Jefferies' downgrade of Carvana stock and the concerns raised by analyst John Colantuoni highlight potential obstacles that Carvana may face in maintaining its current level of profitability. These challenges include the normalization of gross profit per unit metrics, anticipated inefficiencies from accelerated unit growth, and potential future financial burdens from a capital restructure. Investors should carefully consider these factors when evaluating their investment in Carvana.
A "Hot Take" on the implications for a new business:
With Carvana's stock being downgraded and concerns raised about its overvaluation, it serves as a cautionary tale for new businesses in the secondary vehicle market. The downgrade by Jefferies and the concerns expressed by analyst John Colantuoni shed light on potential challenges that can arise as a company experiences rapid growth and the pressure to maintain profitability.
One key takeaway is the danger of overestimating profitability and relying on transitory factors. Carvana's impressive surge in stock performance this year may have been influenced by temporary tailwinds, such as wider wholesale/retail spreads and the timing of loan sales. New businesses need to be cautious about attributing short-term successes to long-term sustainability. It is essential to analyze and understand the underlying drivers of profitability and ensure they can be maintained even as market conditions change.
Additionally, Carvana's anticipated challenges in managing accelerated unit growth and navigating a capital restructure highlight the importance for new businesses to carefully plan and strategize for scalability. As companies grow, they may encounter inefficiencies and financial burdens that can erode profitability. It is crucial for new businesses to anticipate these challenges and have robust plans in place to address them.
Overall, the Carvana case serves as a reminder for new businesses in the secondary vehicle market to balance growth ambitions with a realistic assessment of profitability and a well-thought-out strategy for future challenges. By being mindful of these factors, new businesses can better position themselves for long-term success in this competitive industry.
Article First Published at: https://www.cnbc.com/2023/07/31/sell-carvana-as-the-companys-current-tailwinds-arent-sustainable-jefferies-says-.html