Carvana shares gain momentum as BofA highlights tightened credit and future demand growth

Published 08/10/2024, 17:34
Carvana shares gain momentum as BofA highlights tightened credit and future demand growth

On Tuesday, BofA Securities updated its outlook on Carvana Co. (NYSE:CVNA), raising the price target to $210 from the previous $185 while maintaining a Buy rating. The adjustment follows a thorough review of investor concerns and market conditions that impact the online auto retailer.

The firm's analyst pointed out that Carvana has already addressed issues related to auto delinquencies, which were highlighted by comments from the CFO of Ally Financial (NYSE:ALLY) in July and August. These comments had indicated an expectation of worsening retail auto delinquencies in the upcoming months. Carvana responded by tightening its credit in the fourth quarter of 2023.

Investor skepticism regarding Carvana's ability to achieve a 5% market share by 2032 was another concern. This target is a key component of BofA Securities' discounted cash flow (DCF) model for the company. Some investors had doubted this goal, arguing that Carvana's serviceable addressable market is limited to a lower-income cohort.

Additionally, questions from investors often centered on the potential tightening of vehicle supply, which could restrict growth in 2025 and 2026, or the possible need for Carvana to increase marketing investments as demand rebounds. The firm's analyst believes that Carvana's most significant challenge lies in vehicle reconditioning capacity, not in the supply of vehicles.

Carvana, known for its online car buying and selling platform, has been navigating a dynamic automotive market, shaped by fluctuating supply and demand, as well as changing consumer credit landscapes. The raised price target reflects confidence in the company's strategy and market position despite these challenges.

In other recent news, Carvana has achieved significant milestones in its operations, reaching four million online vehicle transactions since its inception. The company's third-quarter unit sales projections have been raised to 107.8 thousand units, marking a 33% increase year-over-year according to Citi's research.

Despite the positive adjustments, Citi maintains a neutral stance on Carvana. Stephens has reaffirmed its Overweight rating on Carvana, drawing parallels between Carvana's strategy and the successful tactics employed by McDonald's (NYSE:MCD) in the 1960s and 70s. BofA Securities reinstated coverage on Carvana with a Buy rating, citing potential for long-term growth in the used car market.

Evercore ISI and BNP Paribas (OTC:BNPQY) Exane have maintained their In-Line and Neutral ratings respectively. Furthermore, Carvana's management projects a year-over-year growth rate of over 25% for third-quarter unit sales and EBITDA for 2024 between $1 billion and $1.2 billion, surpassing the consensus estimate of $890 million.

InvestingPro Insights

Carvana's recent performance and financial metrics provide additional context to BofA Securities' bullish outlook. According to InvestingPro data, Carvana has shown impressive growth with a 377.37% price total return over the past year, and is currently trading near its 52-week high at 99.64% of that mark. This aligns with the analyst's optimistic view and increased price target.

The company's financials reveal a mixed picture. While Carvana's revenue for the last twelve months stands at $11.67 billion, it has experienced a slight revenue decline of 1.09% during this period. However, the company has managed to improve its profitability, with an operating income of $406 million and an operating income margin of 3.48% for the same period.

InvestingPro Tips highlight that Carvana is trading at a high earnings multiple, which could be a point of concern for value-oriented investors. However, this should be considered in the context of the company's strong recent performance and potential for future growth, as outlined in BofA's analysis.

For investors seeking a more comprehensive analysis, InvestingPro offers 18 additional tips for Carvana, providing a deeper dive into the company's financial health and market position.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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