Piper Sandler analysts see significant upside in Carvana Co CVNA with the stock down more than 90% from its peak.
What Happened: Piper Sandler analyst Alexander Potter upgraded Carvana from Neutral to Overweight on Sunday.
Potter acknowledged that used vehicle prices are falling, rising rates are a risk to the stock and "bankruptcy is a real possibility," but the analyst still believes the stock has fallen way too far to ignore the longer-term opportunity.
"CVNA is now 1/10th as valuable as it was 12 months ago, and after running a detailed sensitivity analysis ... we think many realistic scenarios suggest that CVNA is grossly undervalued," the analyst wrote in a note to clients.
Using a discounted cash flow (DCF) model, Piper Sandler analysts cut their price target to $73, which still implies the stock could nearly double from current levels. The DCF model assumes that Carvana's sales volume will reach 3.3 million units in 2035, representing about 8% of the U.S. used car market.
Moreover, Piper Sandler analysts expect positive EBITDA in 2023 and the company's cash conversion cycle to eventually return to the low/mid-30s.
Piper Sandler said it cut its price target to reflect challenging near-term conditions in the used vehicle market and a higher weighted average cost of capital, but the firm maintains that there is significant upside opportunity in the name longer term.
Piper Sandler told clients that Carvana's value is a function of two key inputs: market share in the used car market and profitability.
"We have analyzed CVNA in these terms, and in our view, there's reason for optimism," Potter said.
CVNA Price Action: Carvana has a 52-week high of $240.58 and a 52-week low of $19.45.
The stock traded above $42 on Monday before pulling back. According to Benzinga Pro, 41.78% of Carvana's float is currently sold short, which could be adding to the volatility in the name.
Carvana shares were up 11.96% at $40.99 at time of publication,
Photo: Tony Webster from flickr
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