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Why Carvana Stock Lagged Behind the Market Today

Motley Fool - Tue Oct 18, 2022

What happened

Carvana(NYSE: CVNA) stock had only a ho-hum day on Tuesday, dragging slightly behind the broader stock market. The big auto retailer's shares bumped up only slightly, not quite hitting the 1% mark while the S&P 500 index motored past that particular traffic light. The chief culprit was an analyst's recommendation downgrade.

So what

We can now count Wedbush prognosticator Seth Basham as no longer in the bull pen of Carvana analysts.

Not only did Basham knock his recommendation on the stock down to neutral from the previous outperform (buy, in other words), he also took a big ax to his price target. He now believes that the shares are only worth $15 apiece, quite the comedown from his former estimation of $50.

Basham's new and more gloomy take derives from both the state of the automobile market in general and company-specific challenges. He wrote in the research note detailing the downgrade and target price cut that "a further deterioration in market conditions, a bloated cost structure, and high cash burn" are combining to greatly reduce Carvana's potential.

Now what

Another red flag for Carvana's future, according to Basham, is its shaky finances. The company is struggling with $336 million in additional yearly interest expenses due to its May acquisition of the Adesa auto auction business from peer KAR Global(NYSE: KAR), the prognosticator wrote. As such, it is at risk of not being liquid enough to sustain its operations through 2023.

The analyst believes that Carvana will need to find additional liquidity, and the most convenient triggers to pull are a capital raise -- which risks diluting existing shareholders -- or sales of company-owned real estate.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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