Carvana Cos. has experienced a significant rally in its stock this year, but one analyst believes that Wall Street may not be fully assessing the risks ahead for the used-car retailer.

In a recent note to clients, Jefferies analyst John Colantuoni expressed his concern over the consensus view, stating that it “appears to overestimate the sustainability of recently elevated profitability.” According to Colantuoni, this elevated profitability has been boosted by temporary factors that are expected to diminish in the coming quarters.

Colantuoni specifically points to Carvana’s momentum in retail and other closely monitored metrics such as gross profit per unit (GPU). He argues that much of this success can be attributed to “transitory tailwinds like wider wholesale/retail spreads and the timing of loan sales”, which are unlikely to continue at their current rates. Additionally, he anticipates “an acceleration in unit growth next year leading to inefficiencies that further negatively impact per unit economics.”

Another key observation made by Colantuoni is that sales, general, and administrative expenses per unit have remained stagnant over the past three quarters. This indicates to him that Carvana has reached a point where further reductions in fixed costs are unlikely, thus limiting their ability to drive improvements in per-unit expenses.

It is important for investors to consider these potential risks when evaluating Carvana’s future prospects. While the company has seen significant success thus far, it is crucial to maintain a cautious approach amidst these concerns.

Carvana Stock Sees a Minor Decline, Despite Significant Yearly Surge

Shares of Carvana, an online used car retailer, experienced a slight drop of over 1% during premarket trading on Monday. However, it is important to note that the stock has skyrocketed by more than 800% so far this year.

Concerns Surrounding Carvana’s Capital Structure

Despite Wall Street’s positive response to Carvana’s recent debt deal disclosure, there are concerns about the company’s actions regarding its capital structure. One particular area of concern is the ongoing at-the-market equity offering. This offering allows Carvana to raise up to $1.5 billion, which creates the possibility of additional dilution beyond the $225 million already issued. Analyst Colantuoni acknowledges this risk and explains that it could potentially impact the stock’s value in the near term. In fact, Colantuoni has lowered his price target for Carvana from $55 to $30 in his latest report. Moreover, he mentioned that doubts about the sustainability of Carvana’s business model may resurface.

Analyst Downgrades and Disappointing Momentum

Colantuoni is not alone in his reservations about Carvana’s future. In fact, he joins several other analysts who have also downgraded the stock within the past couple of weeks. Despite recent momentum in its stock price, questions continue to linger regarding Carvana’s prospects.

Additional Readings

For more information on Carvana’s stock performance and market analysis:

  • Carvana’s stock ‘second chance’ is already priced in, says Morgan Stanley
  • Questions persist as Carvana’s stock catches another downgrade
  • An analyst urges caution amidst Carvana’s impressive stock rally

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