Carvana (NYSE:CVNA) stock might look appealing to gamblers, but trying to salvage this clunker of a stock will likely only lead to frustration and capital loss. I am bearish on CVNA stock because analysts expect it to lose value, and they have valid reasons for believing this.
Carvana provides an online platform where people can buy and sell “pre-owned” or used vehicles. CVNA stock was a darling of the market — or at least, of meme stock traders — in 2020 and 2021. Carvana seems to have lost its mojo in 2022 and early 2023, however, as the market’s weighing machine determined that Carvana is heavy on debt and light on income.
Thus, CVNA stock is a textbook example of the difference between gamblers and serious investors. You might have to do some soul-searching to define your risk tolerance and consider why you’re trading stocks in the first place. Then, you’ll probably want to avoid the car wreck that is Carvana stock.
CVNA Stock Goes Up for the Wrong Reasons, or for No Reason at All
Here’s an example of why CVNA stock attracts some retail traders. The stock went up 10% on February 15, even though there was no news to justify such a price move. The CPI print of 6.4% annualized inflation had already come out the day before, and this was worse than the 6.2% economists had expected. Moreover, there wasn’t a press release from the company on February 15.
If anything, the CPI print indicates that the Federal Reserve might keep interest rates higher for longer, which wouldn’t be good for Carvana since high interest rates disincentivize auto loans. Yet, none of this seems to matter to meme stock traders, who sometimes bid up the CVNA stock price for no apparent reason.
Here’s another example of what I’m talking about. On February 8, Carvana stock spiked 27% in the middle of the trading session. The evident cause, besides rampant speculation, was a report from Manheim that used vehicle prices were up in January.
The gamblers will find just about any excuse to jump into a trade, but let’s consider the implications of the uptick in used car prices. For one thing, even though the Manheim index was up in December and January, that same index was down for six consecutive months prior to that.
Besides, rising vehicle prices aren’t necessarily bullish for Carvana, since shoppers might decide to keep their current vehicles longer if purchasing another car suddenly costs more.
Carvana’s “Poison Pill” Strategy Spells Trouble
As we’ll discover in a moment, despite occasional share-price bumps, Wall Street isn’t particularly hopeful for CVNA stock. There are a number of reasons for analysts’ pessimism about Carvana. Among them, undoubtedly, is Carvana’s “poison pill” strategy, which the company actually attempted to spin as a positive development.
Before we get to the poison pill, consider Carvana’s financial and operational problems. Carvana’s Q4-2022 retail sales are expected to decline to around 86,000 vehicles, down sharply from the ~113,000 vehicles Carvana recorded in the year-earlier quarter. Moreover, Carvana’s revenue is declining while its net loss is widening. Additionally, Wedbush analyst Seth Basham assigned a $1 price target to CVNA stock, citing Carvana’s $2.2 billion acquisition of Adesa’s U.S. physical auction business as an “albatross around [Carvana’s] neck.”
Here’s the real kicker, though. Carvana tried to spin its so-called “Tax Asset Preservation Plan,” in a positive light, but most likely, it’s just a poison pill strategy implemented to prevent a hostile takeover by 5%-or-greater shareholders.
The implication here is that activist investors may seek to fire/replace Carvana’s management for doing a poor job and/or steering the company in the wrong direction. “Poison pill” strategies might help the current management of a business keep their jobs for a while, but these tactics are typically not a good sign for a company.
Wall Street’s Take: Analysts Expect CVNA Stock to Decline
Now, here’s where the rubber meets the road. Given everything we’ve discussed today, it’s easy to see why Wall Street envisions a steep decline in Carvana stock. So, here’s the breakdown: CVNA has a Hold consensus rating on Wall Street based on two Buy ratinga, 12 Holds, and two Sells assigned in the past three months. Alarmingly, the average Carvana sock price target is $8.35, implying 23.5% downside potential.
Conclusion: Should You Consider Carvana Stock?
It’s one thing to hold a share or two of CVNA stock just as a fun lottery ticket. However, serious investors should investigate Carvana’s financial and operational issues, while also thinking about why analysts are preparing for Carvana stock to decline.
In the final analysis, CVNA stock might be fine for short-term trading in very small quantities. Yet, it’s wise to treat Carvana stock like a hot potato: if you hold it for an extended period of time, you’re only asking to get burned.
