Analyst Takes Carvana For A Spin, Double Upgrades On Solid Float, Long-Term Opportunity

Carvana Co CVNA is up 160 percent year-over-year, and one seller is signing on for the continuing momentum. 

The Rating

B. Riley FBR analyst Sameet Sinha upgraded Carvana from Sell to Buy and increased the price target from $20 to $38.

The Thesis

Sinha identified particular “scarcity value” in the stock’s 10-percent float.

“The company has underperformed fundamentally and has raised capital — all part of our initial thesis — but we got the stock wrong,” Sinha said in a Thursday note. “Investors in CVNA understand this is an early stage venture which will be volatile in the near term and they are willing to ignore issues in lieu of the long-term opportunity.”

Modeling expansion to 36 new markets this year, Sinha orecast a large market opportunity and expects Carvana to grow its share from about 0.2 percent in 2017 to 1.2 percent in 2020. At the same time, the analyst forecast profitability at scale and anticipates free cash flow in 2020 — notably achieved on cash burn of $400 million.

The online used car platform's recent capital raise closed a gap in B. Riley's immediate funding model, while Carvana's first-quarter results and 2018 guidance attest to the potential leveraging of operating expenses in the second half through compensation, ad spend and overhead, Sinha said. 

The analyst identifies gross margin levers in inventory turns and improved logistics efficiency, with drivers of gross-profit-per-unit growth in higher trade-in sourcing, captive financing and improved wholesale operations.

“We are now looking at CVNA as an early stage venture that has the potential to deliver returns generally seen by VCs." 

Price Action

Carvana shares were rallying 8.3 percent at the time of publication Thursday afternoon.

Related Links:

CarMax's Story Can Only Get 'Better From Here,' Analyst Says After Q4 Print

Oppenheimer Upgrades CarMax, Says Used Car Sales, Tax Savings Support Bullish Move

Photo by Carvana via Wikimedia.