Morgan Stanley, Wedbush Cautious On Carvana

Shares in online car retailer Carvana Co CVNA have traded up recently, but sell-side analysts said Tuesday that investors may be buying without kicking the tires.

The Analysts

Morgan Stanley’s Armintas Sinkevicius reiterated an Underweight rating on Carvana with a $21 price target.

Wedbush’s Seth Basham maintained a Neutral stance on the stock with a $52 price target.

Morgan Stanley 

Morgan Stanley expects used car sales to decline, and if the auto credit cycle rolls over, it would be negative for Carvana, Sinkevicius said in a Tuesday note. 

What’s driving the stock higher may be exuberance among investors about the move to online buying in the used car market — which the analyst said may be misplaced.

“We are concerned with the pace at which consensus expects this business (to) scale,” Sinkevicius said in the Tuesday note.

The stock has gone up despite negative estimate changes and insiders selling shares, he said.

“It may just be easier for investors to say ‘car sales are moving to online sales’ than it may be for the bears to defend their position." 

Wedbush

The surge in share price in recent weeks has been at least partly in anticipation of the company’s first foray into bundling its auto loans into asset-backed securities for sale, Basham said in a Tuesday note. 

That sale of securities could present a lower-cost alternative to corporate bonds as the company seeks to scale dramatically, the analyst said.

Company officials say they want to reach 2 million car sales a year, a 20-fold growth line, Basham said. 

Webdush touched on the hype that Morgan Stanley worries about — but buys in more.

“This online-focused used car retailer is at the forefront of meeting changing demands of car buyers in the massive used car industry,” Basham said. “CVNA’s technology-driven, customer-centric, vertically integrated business model is highly scalable, positioning the company for rapid growth.”

The analyst agrees the market may be getting ahead of things.

“While we have a high degree of confidence in CVNA’s ability to succeed, we see shares near fair value and prefer to wait for a better entry point." 

Price Action

Carvana shares were up 6.58 percent at $62.82 at the close Tuesday. 

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