Shares of Carvana Cos. are in the midst of a roaring rally this year, but one analyst thinks Wall Street isn't appropriately considering risks facing the used-car retailer.
The consensus view "appears to overestimate the sustainability of recently elevated profitability, which we believe benefited from transitory tailwinds that will abate in the coming quarters," Jefferies analyst John Colantuoni wrote in a weekend note to clients as he downgraded Carvana's $(CVNA)$ stock to underperform from hold.
In Colantuoni's view, Carvana's momentum on retail and other gross profit per unit (GPU), closely watched metrics, benefited from "transitory tailwinds like wider wholesale/retail spreads and the timing of loan sales" that aren't liking to continue at current rates. Further, he expects "an acceleration in unit growth next year leading to inefficiencies that further negatively impact per unit economics."
He noted that sales, general and administrative expenses per unit have been flat for the past three quarters, indicating to him that Carvana is past the point of recognizing reductions from fixed costs, thus limiting the company's opportunities to drive improvements in per-unit expenses.
Shares of Carvana were off more than 1% in premarket trading Monday, though they've surged more than 800% so far this year.
While Wall Street was encouraged by a recent debt deal that Carvana disclosed, he sees some risk in the actions the company is taking around its capital structure. An ongoing at-the-market equity offering, for one, "gives [Carvana] the option to raise up to [$1.5 billion], which poses near-term risk of additional dilution beyond the $225M already issued," Colantuoni said.
He cut his price target to $30 from $55 in his latest report, while warning that concerns about the "viability" of Carvana's business model could "resurface."
Colantuoni joined several other analysts who have downgraded the stock over the past couple of weeks.
