Carvana (ticker: CVNA), a used-car retailer, is experiencing a decline in shares following a downgrade. The company surprised investors by releasing its second-quarter earnings ahead of schedule and reported its most profitable quarter to date. Additionally, Carvana announced a groundbreaking agreement with bondholders to reduce its outstanding debt by over $1.2 billion. This move will substantially decrease the company’s note maturities and lower its cash interest expense for the next two years.
Despite a 40% surge on Wednesday, Carvana’s stock has fallen 16% in Thursday’s trading, settling at $47.05. The shares have experienced an astronomical tenfold increase in price since the end of 2020 when they closed at $4.74. Now, an analyst team has suggested that it may be time to sell.
RBC Capital Markets analysts, led by Brad Erickson, downgraded Carvana’s stock from Sector Perform to Underperform in a Thursday report. Although they increased their price target to $30 from $9 and raised revenue and earnings estimates for 2023 and 2024, the target price still falls significantly below the current market price. The analysts anticipate the stock to eventually align with their projection once volatility stabilizes.
While acknowledging the positive impact of the second-quarter results and debt restructuring, the analysts maintain their downgrade based on fundamental factors. They believe that the long-term margin improvements have been excessively valued and a swift return to growth is necessary to cover debt costs. Moreover, they anticipate significant dilution and an expanded debt burden after the restructuring takes place.
In conclusion, Carvana’s impressive performance has been overshadowed by a downgrade in its stock rating. Investors must carefully consider the future prospects of the company amidst potential challenges and evolving market conditions.