Carvana Analysts Raise Concerns over Margins and Unit Economics Post Q2 Beat

RBC Capital analyst Brad Erickson downgraded Carvana Co CVNA from Sector Perform to Underperform and raised the price target from $9 to $30.

CVNA's better Q2 results, debt restructuring & newly enabled access to equity capital again reduced liquidity risks - a big positive for the stock. 

The analyst believes long-term margin improvements are likely well and overly appreciated, a faster (potentially margin-stalling) return to growth is probably necessary to cover debt costs, and significant dilution & expanding debt load post-restructure are likely coming. 

The analyst raised the estimates and targets, given better near-term performance & lower liquidity risks.

Raymond James Mitch Ingles maintained a Market Perform. The re-rating followed Carvana's 2Q23 earnings results, conference, and follow-up calls. 

He raised his forecast to reflect Carvana's 2Q23 adjusted EBITDA beat and outlook for adjusted EBITDA to remain positive in 3Q. 

In addition, CVNA announced a debt restructuring deal that could eliminate ~$1.2 billion (or ~18% of total existing debt) — reflecting a positive step towards fulfilling debt obligations (currently estimated at $594 million for 2023). 

Overall, CVNA has demonstrated flexibility in managing their balance sheet and corporate overhead; however, he remains neutral due to shares up ~550% over the prior three months, accurately reflecting the improvement in CVNA's performance, and is concerned that industry-wide challenges (such as affordability issues) could weigh down on CVNA's recovery over the next twelve months. 

Wedbush analyst Seth Basham maintained Carvana an Underperform and raised the price target from $1 to $40.

CVNA reported 2Q23 results that were well above expectations on adjusted GPU and EBITDA, guided to positive 3Q23 adjusted EBITDA, and announced a transaction support agreement (TSA) with unsecured bondholders. 

The analyst sees most of the upside in EBITDA as unstainable due to transitory benefits from selling backlogged loan sales and favorable market pricing dynamics. 

Moreover, when CVNA attempts to grow unit sales, retail GPU efficiency benefits from scale in reconditioning and logistics will likely be offset by less advantageous sourcing. 

Assuming consistent retail unit sales rates in the 76k range and seeing limited additional SG&A cut opportunities, SG&A per unit is nearly $5,000. That leaves a business generating a little over $100 in adjusted EBITDA per unit and only ~$100 million of annual adjusted EBITDA against capex of at least $100 million and cash interest expense of ~$180 million after the debt restructuring, meaning material cash burn will persist. 

Price Action: CVNA shares are trading lower by 16.10% at $46.84 on the last check Thursday.