BMO Downgrades Carvana On Q4 Miss, Weak Guidance

Online-only used card dealer Carvana Co CVNA reported below-consensus fourth-quarter results and guidance after the close Tuesday.

The Analyst

BMO Capital Markets analyst Daniel Salmon downgraded Carvana from Outperform to Market Perform and lowered the price target from $23 to $15.

The Thesis

Carvana — though capable of delivering strong retail unit and revenue growth thanks to its disruptive business model — is likely to have a long, winding road to profitability, Salmon said in a Wednesday note. (See the analyst's track record here.) 

BMO is stepping to the sideline due to Carvana's guidance for 2018 unit sales, which was well below BMO's prior estimates, as well as expectations for 2018 EBITDA losses roughly in line with that of 2017, the analyst said. 

Carvana's market share, though small, is accelerating quickly, Salmon said. Applying even a 2-percent market share to the used car market, the company could generate about $15 billion in revenue and about $400 million in EBITDA based on a below-market-average EBITDA margin of 4 percent, according to BMO. 

"At just an 8x multiple, this would value the company at $4.8 billion," Salmon said. "While we don't necessarily disagree with this logic, the path to this scenario is now less visible."

The Price Action

Carvana shares were up about 68 percent over the past year until Tuesday. 

The stock closed down 6.58 percent at $17.46 on Wednesday. 

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