Carvana's Price is Expected to Plummet by More Than 70% in the Coming Months, According to Jpmorgan

JPMorgan has advised a cautious approach to Carvana, following a significant surge in its share price this year. Analyst Rajat Gupta, in a recent note to clients, downgraded the used car e-commerce platform from neutral to underweight. With a price target of $10, Gupta suggests a potential decline of 74.3% for the stock.

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In response to the downgrade, Carvana's shares experienced a premarket trading slide of 4.6%. The company had seen an extraordinary rise of over 700% in 2023, following a drastic drop of nearly 98% in share value during 2022, which had raised concerns about the possibility of bankruptcy.

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Gupta highlighted the widening gap between Carvana's valuation and its underlying fundamentals. He emphasized that, over the past nine months, investors had focused more on the company's liquidity and its ability to withstand a potential recession, rather than assessing its long-term business model. During this period, Carvana implemented cost-cutting measures, reducing selling, general, and administrative expenses. Additionally, improved asset-backed security spreads and a resilient pricing market for used cars contributed to the company's ability to manage cash burn and allay bankruptcy fears. Gupta also noted that the near-term gross profit per unit had exceeded expectations due to the cost-cutting measures.

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JPMorgan, in a previous assessment, had suggested that Carvana should consider an equity raise to alleviate concerns. The recent rally in stock prices could help counter arguments that an equity raise would dilute existing equity. The bank still believes that an ideal scenario would involve a debt and equity exchange, particularly one that extends into the 2030s, which would help mitigate risk in the latter half of the 2020s.

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Gupta identified a key issue with Carvana's outlook, asserting that investors anticipate a stronger resurgence in growth and leverage in 2024 than is realistic. Given the challenges in the supply chain, limited confidence in selling, general, and administrative expenses, and the persistent risk of moderating gross profit per unit levels, Gupta expressed skepticism about the market's expectations being accurate.

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Moreover, Gupta argued that a return to growth would not necessarily serve as a positive catalyst since the stock already incorporates a double-digit unit compound annual growth rate for 2024, 2025, and 2026. Instead, attention will likely shift towards assessing long-term unit and margin targets, according to Gupta's observations.

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