Is Carvana Stock 'Grossly Undervalued'? Piper Sandler Still Sees 100% Upside After Slashing Price Target

Piper Sandler analysts see significant upside in Carvana Co CVNA with the stock down more than 90% from its peak. 

What Happened: Piper Sandler analyst Alexander Potter upgraded Carvana from Neutral to Overweight on Sunday.

Potter acknowledged that used vehicle prices are falling, rising rates are a risk to the stock and "bankruptcy is a real possibility," but the analyst still believes the stock has fallen way too far to ignore the longer-term opportunity.

"CVNA is now 1/10th as valuable as it was 12 months ago, and after running a detailed sensitivity analysis ... we think many realistic scenarios suggest that CVNA is grossly undervalued," the analyst wrote in a note to clients.

Using a discounted cash flow (DCF) model, Piper Sandler analysts cut their price target to $73, which still implies the stock could nearly double from current levels. The DCF model assumes that Carvana's sales volume will reach 3.3 million units in 2035, representing about 8% of the U.S. used car market. 

Moreover, Piper Sandler analysts expect positive EBITDA in 2023 and the company's cash conversion cycle to eventually return to the low/mid-30s.

Piper Sandler said it cut its price target to reflect challenging near-term conditions in the used vehicle market and a higher weighted average cost of capital, but the firm maintains that there is significant upside opportunity in the name longer term. 

See Also: Bristol-Myers Squibb To $87? Here Are 5 Other Price Target Changes For Monday

Piper Sandler told clients that Carvana's value is a function of two key inputs: market share in the used car market and profitability. 

"We have analyzed CVNA in these terms, and in our view, there's reason for optimism," Potter said. 

CVNA Price Action: Carvana has a 52-week high of $240.58 and a 52-week low of $19.45.

The stock traded above $42 on Monday before pulling back. According to Benzinga Pro, 41.78% of Carvana's float is currently sold short, which could be adding to the volatility in the name.

Carvana shares were up 11.96% at $40.99 at time of publication,

Photo: Tony Webster from flickr