Citi says that Carvana could regain some of its share value, despite the current headwinds. Reporting was initiated by Ronald Josey, an analyst. He set a price goal of $5.50. This represents a 11.1% gain over Monday’s closing. Josey stated that Carvana accounts for less than 1% of all used car sales. However, the company would be well-positioned to gain share in a normal used car market. In a note to clients, he stated that Carvana would be well-positioned to continue to gain share in a normalized market for both new and used cars. This is due to the fragmented online retail sector for used cars. But in the near-term, he said “the combination of higher interest rates, declining used vehicle prices (after rising significantly from 2020 – present), limited new vehicle supply, and a weaker economic backdrop have created a challenging operating environment.” After a Bloomberg report that stated Carvana’s largest creditors had agreed to negotiate with the company about its debt, Carvana’s future is becoming increasingly worrying. Investors saw this as a sign of possible Chapter 11 bankruptcy. Josey said that management and creditors should be able reach an agreement. Stock gained 1.4% just before the bell but has plunged 97.9% this fiscal year. Josey’s $5.50 target price would still be lower than the stock’s pandemic high of $360.98. In 2021, retail sales increased 74% compared to 10% in the wider industry. This continues the positive trend of 37.5% growth in 2020, and 90% growth for 2019. The company was motivated to invest in infrastructure in 2022. Unfortunately, this came at a time when prices started to impact demand and inventory began to decline. Josey indicated that Carvana would likely need capital to support its operations in the future. Carvana, which employed 1,500 people, laid off approximately 8% last month. Josey indicated that he would be monitoring the used car retailer’s relationship with Ally (which is its primary financing partner) and Adesa (a used car auction it purchased). He is also keeping an eye on gross profit trends, which he expects to fall by 35% in the fourth-quarter. This will be in addition to progress towards overall profitability. Josey stated that a recovery in the wider auto market would benefit Carvana. Therefore, he will be looking for improved vehicle affordability, normalized vehicle depreciation rates and increased inventory to help improve consumer sentiment. — CNBC’s Michael Bloom contributed to this report.
Citi says Carvana could perform well in ‘more normalized’ environment,’ but near-term headwinds remain
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