Shares of Carvana (NYSE:CVNA) dived almost 40% on November 4 following dismal Q3 results as well as raised liquidity and financing concerns for the online used-car retailer. The stock was further hammered by lowered price targets by the Wall Street community and the withdrawal of a rating by Morgan Stanley analyst Adam Jonas.
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The Q3 adjusted loss of $2.67 per share significantly lagged analysts’ estimated loss of $1.90 per share. Further, it was much worse compared to a loss of $0.38 per share in the prior-year period.
Meanwhile, revenues declined 3% year-over-year to $3.39 billion and lagged consensus estimates of $3.71 billion.
Citing reasons for not providing a quantitative outlook, Carvana CEO Ernie Garcia commented, “In light of current industry and macroeconomic conditions, we believe forecasting the environment over the coming months and quarters is difficult, and we plan instead to provide more real time color on how certain key dynamics are likely to impact our results.”
Pessimism Deepens Following Wall Street’s Reaction
Following disappointing Q3 results, Morgan Stanley analyst Adam Jonas withdrew his rating and price target on Carvana, citing a visible downturn in the used car market as well as funding uncertainty.
Jonas stated, “While the company is continuing to pursue cost-cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment (bonds trading at 20% yield) add material risk to the outlook, contributing to a wide range of outcomes (positive and negative).”
Like many analysts, Brad Erickson from RBC Capital Markets cut his price target on Carvana to $14 (59.82% upside potential) from $35 while reiterating a Hold rating.
Though he believes that the market for used cars should eventually revive, he stated, “Retail units are declining with units and GPU getting worse into the fourth quarter, expense cuts aren’t going as fast as desired and investor concerns around liquidity and the company’s need to raise further equity should continue to rise.”
Is CVNA a Good Stock to Buy?
As per TipRanks, analysts are both cautious and optimistic about the stock and have a Moderate Buy consensus rating, which is based on eight Buys and 10 Holds. Carvana’s average price forecast of $41.41 implies 372.72% upside potential.
Concluding Thoughts
Carvana stock has lost 97% of its market capitalization over the past year and is trading far below its all-time high level of $350 reached during the pandemic years.
The market for used cars boomed during the pandemic years due to the limited affordability and lack of availability of new cars. The shortage was due to a global shortage of semiconductor chips as well as other supply constraints. However, the demand for used cars has now normalized and is further negatively impacted by higher interest rates and macro uncertainty.
The industry-wide sluggish demand and profit warnings are signs of choppy waters ahead for the company, and investors might want to remain on the sidelines until they see some signs of recovery.
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