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Carvana expanding business moat boosts stock potential - JPMorgan

EditorEmilio Ghigini
Published 01/08/2024, 10:50
CVNA
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On Thursday, JPMorgan (NYSE:JPM) adjusted its outlook on Carvana Co. (NYSE:CVNA) stock, raising its price target on the company's shares to $185 from the previous $155, while reiterating an Overweight rating.

The firm's analyst cited several reasons for the optimistic stance, including Carvana's trading multiples, upward momentum in earnings revisions, and the possibility of balance sheet restructuring actions.

Carvana's shares are currently trading at approximately 17 times the forecasted FY26 enterprise value to EBITDA (EV/EBITDA) and 20 times the un-levered enterprise value to free cash flow (EV/FCF).

These multiples are not considered demanding given the company's expected compound annual growth rate (CAGR) of over 25% for EBITDA and FCF from 2024 to 2026. The analyst believes that continued growth in these metrics will support the company's shares.

Moreover, the firm anticipates that Carvana will see its business moat widen with each quarter, potentially drawing long-term investors who have been hesitant. This is expected to be supported by ongoing improvements in earnings, which should continue to provide positive momentum for the stock.

JPMorgan also noted the potential for Carvana to undertake further balance sheet restructuring. This could include the ability to call the 2028 notes as of August 15, 2024, and opportunities to refinance more expensive notes due in 2030 and 2031.

While Carvana has indicated no plans to issue new high-yield debt or convertible notes in the near future, these restructuring actions are seen as beneficial to the company's valuation.

The analyst concluded by highlighting the potential for valuation benefits from possible rate cuts later in the year, maintaining Carvana as their top pick within the auto retail sector. The positive outlook reflects the firm's confidence in Carvana's growth trajectory and financial strategies moving forward.

In other recent news, Carvana Co. has been at the center of various analyst prognostications and company developments. The online used car retailer's projected core profit for 2024 is expected to surpass Wall Street analysts' expectations, fueled by robust demand for its used vehicles and efficient inventory management.

JPMorgan, BTIG, and Needham have all shown confidence in Carvana's growth trajectory, with JPMorgan raising its price target to $185, BTIG initiating a Buy rating with a $155 price target, and Needham upgrading its rating to Buy with a $160 price target.

TD Cowen, however, has maintained its Hold rating on Carvana's shares, anticipating a 12% year-over-year revenue growth for the second quarter of 2024. This is attributed to an acceleration in retail unit sales growth as the company focuses on enhancing vehicle production.

Furthermore, Carvana has reported a significant increase in total retail units sold in the second quarter, with a 33% rise to 101,440 units. This upward trend is expected to continue into the third quarter. For the second quarter ending June 30, Carvana reported a net income of $48 million, a turnaround from the net loss of $105 million in the same period the previous year.

These are recent developments that provide insights into Carvana's financial performance and strategic direction.

InvestingPro Insights

As Carvana (NYSE:CVNA) continues to capture the attention of investors and financial analysts, InvestingPro data offers a deeper dive into the company's financial health and market performance. Carvana's market capitalization stands at a robust $27.24 billion, signaling significant investor confidence in the company's business model and future prospects. Despite a challenging revenue growth trend over the last twelve months, with a decrease of 11.7%, Carvana has demonstrated a strong quarterly revenue growth of 17.46% in Q1 2024, indicating a potential turnaround or seasonal strength in its business.

InvestingPro Tips highlight a mixed picture; while the company is trading at a low P/E ratio relative to near-term earnings growth, it suffers from weak gross profit margins at 17.58%. This could suggest challenges in maintaining profitability or cost pressures in its operations. Furthermore, with a high Price / Book multiple of 94.26, investors may be paying a premium for the company's net assets. It's important to note that analysts do not anticipate Carvana to be profitable this year, which may cause some concern for potential investors looking for immediate returns.

For those interested in further insights, there are additional InvestingPro Tips available, offering a comprehensive analysis of Carvana's financial and market performance. The company's liquid assets exceeding short-term obligations and a moderate level of debt indicate a stable financial position, which could be a reassuring factor for investors considering the company's stock.

InvestingPro provides a fair value estimation of $128.28 for Carvana, slightly below the current price, suggesting that the stock may be somewhat overvalued at its previous close of $133.23. As the market continues to evolve, these insights can help investors make informed decisions about their investments in Carvana.

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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