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JPMorgan Predicts Carvana's Stock Could Plunge Over 70% Despite Its Soaring Performance in the Current Year

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Time to Reconsider Carvana Stock, says JPMorgan

Carvana's Shares Expected to Fall

JPMorgan analyst, Rajat Gupta, has downgraded the used car e-commerce platform, Carvana, from neutral to underweight, citing a disconnection between the company's valuation and its fundamentals. Gupta's $10 price target suggests a potential 74.3% decrease in the stock's value. Carvana shares have experienced a remarkable surge of over 700% this year after a steep decline in 2022. However, Gupta believes that investors' positive outlook for the company's future growth and leverage in 2024 is unrealistic given the challenges in the supply chain.

Carvana's Performance in the Past Nine Months

Gupta explains that investors have been primarily focused on Carvana's liquidity and its ability to withstand a potential recession, rather than the company's long-term business model. During this period, Carvana has managed to reduce selling, general, and administrative expenses, improve asset-backed security spreads, and maintain a resilient pricing market for used cars. As a result, the company has been able to slow down its cash burn, increase its liquidity, and alleviate concerns about bankruptcy. Gupta highlights that Carvana's gross profit per unit has been higher than usual due to cost-cutting measures.

JPMorgan's Revised Expectations

JPMorgan has raised its non-GAAP EBITDA and gross revenue per unit expectations for Carvana's fiscal years from 2023 to 2025. However, the bank still suggests that Carvana consider an equity raise to further address concerns. JPMorgan believes that a combination of a debt and equity exchange, focused on the 2030s, would be an ideal outcome to reduce risk in the second half of the 2020s. The bank also highlights that Carvana's focus should shift to long-term unit and margin targets, rather than expecting a significant return to growth.

The Challenges Ahead for Carvana

Gupta points out several challenges that Carvana will need to overcome. These include supply chain difficulties, uncertainty in the selling, general, and administrative expense space, and the potential moderation of gross profit per unit levels. Additionally, he emphasizes that a return to growth will not necessarily be a positive catalyst for the stock, as the market has already priced in a double-digit unit compound annual growth rate for 2024, 2025, and 2026. Therefore, the focus should be on achieving long-term unit and margin targets to sustain investor confidence.

Potential Impact on New Business

The recent analysis and downgrade of Carvana stock by JPMorgan offer valuable insights for new businesses entering the e-commerce and automotive industries. The key takeaway from this report is the importance of maintaining a strong connection between company valuation and fundamentals. Investors' emphasis on liquidity and short-term resilience may overshadow the long-term sustainability of a business model.

For new businesses, it is crucial to strike a balance between short-term financial stability and long-term growth potential. While liquidity and the ability to weather economic downturns are important considerations, they should not take precedence over building a strong and sustainable business model.

Supply chain challenges, uncertainties in expenses, and potential fluctuations in profit margins are common hurdles faced by businesses. It is essential for new companies to anticipate and effectively address these challenges to maintain investor confidence.

Furthermore, new businesses should learn from Carvana's experience and set realistic growth expectations. The market's tendency to already price in anticipated growth rates underscores the importance of focusing on achievable long-term unit and margin targets rather than heavily relying on unrealistic future projections.

Ultimately, new businesses must approach their ventures with a clear understanding of their valuation and fundamentals, while demonstrating their ability to navigate challenges and sustain growth in the long run.

Article First Published at: https://www.cnbc.com/2023/07/13/jpmorgan-says-carvana-can-fall-more-than-70percent-after-skyrocketing-this-year.html

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