MW Here's how Carvana pulled off its 'epic turnaround'
By Claudia Assis
Carvana is the hardest stock to get right, one analyst says, with shares up 1,500% in the last 12 months
Wall Street lavished praise on Carvana Co.'s "epic turnaround" on Thursday following a surprise quarterly profit for the used-car retailer, which not too long ago had skirted close to bankruptcy.
Carvana's stock (CVNA) rallied late Wednesday after the company reported the surprise earnings and larger revenue, and the rally gathered steam on Thursday. Carvana, one baffled analyst said Thursday, is perhaps the hardest stock make calls on.
The stock jumped another 36% Thursday, on track for its highest close since April 5, 2022, when it closed at $121.46, and for its largest one-day percentage jump since July 19, 2023, when it rose 40.2%.
The shares have more than doubled this year and are up an eye-popping 1,500% in the past 12 months. That compares with gains of around 6% in the year to date and 22% in the last 12 months for the S&P 500 SPX.
Crucially, Carvana said it sold 91,878 vehicles retail in the first quarter, up 16% year over year. That was "well ahead of expectations," with the metric returning to growth for the first time since June 2022, Sharon Zackfia at William Blair said.
Growth was achieved thanks to strong demand, improved conversions and strong execution, and despite lower advertising spending and constrained inventory, she said.
Carvana's "pivotal" first-quarter results confirmed an "epic turnaround" for the company, Zackfia said. The analyst raised her expectations for Carvana's adjusted earnings before interest, taxes, depreciation and amortization by more than 60% to nearly $1 billion in the second quarter, and she said she expects adjusted Ebitda to "more than triple" between 2023 and 2025.
In early 2023, many on Wall Street thought Carvana "was at death's door," Piper Sandler analyst Alex Potter said.
"We disagreed with this view at the time, but we did not anticipate the impressive pace of [Carvana's] coming recovery," Potter said. "If we had, we wouldn't have downgraded it in July 2023, after [Carvana] had risen to what we saw as a fairly valued $48. Now, with the stock indicated around $115, we've got egg on our faces."
First-quarter results "serve as yet another reminder that, in our coverage, [Carvana] is perhaps the hardest stock to 'get right,'" Potter said. The analyst boosted his price target on the stock to $105, implying a downside of around 9% over Thursday prices, and kept his hold rating on the stock.
Carvana was on the brink of bankruptcy when it inked a key deal with its bondholders to restructure its crippling debt.
The move provided a much-needed liquidity boost, as it eliminated more than 83% of Carvana's unsecured-note maturities and reduced its required cash interest expense by more than $430 million annually over the next two years.
Carvana "has regained its position as the apex predator in used auto retailing with a well-lit runway to further unit growth, and is now operating from a position of profitable growth," Needham analyst Chris Pierce said in his note.
Bulls will focus on Carvana's spare capacity and 1% industry market share, while valuation and the company's debt burden will continue to be bears' talking points, the analyst said.
"We see increasing flexibility with [Carvana's] current debt picture, with eventual refinancings a likely option, lowering interest payments and pushing more earnings" to the company's bottom line, he said.
-Claudia Assis
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(END) Dow Jones Newswires
May 02, 2024 12:33 ET (16:33 GMT)
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