What happened
Auto-dealership operator Carvana's (CVNA 2.85%) stock was a bit of a wreck on Wednesday. Panic selling in the shares resulted in a brief "circuit-breaker" halt in trading early on, but eventually, the shares limped to a more than 18% decline at market close.
Investors were spooked that a restructuring move portends serious trouble in its business. Plus, a pricey new acquisition and an analyst downgrade didn't improve the situation.
So what
On Tuesday, Carvana formally announced an agreement with peer KAR Global for $2.2 billion. Under the terms, Carvana will be the new owner of Adesa U.S., KAR Global's auto auction business. This includes 56 Adesa locations in this country.
Image source: Getty Images.
In its press release on the matter, the auto retailer quoted its founder and CEO Ernie Garcia as saying that owning Adesa U.S. will help it "focus on significant and sustainable efficiencies, and unit economic improvements, for Carvana to catapult back into rapid profitable growth as the industry inevitably rebounds."
Somewhat awkwardly, this news was divulged on the same day that Carvana revealed that it plans to lay off roughly 2,500 of its workers -- around 12% of its total employee rolls. The company added that the affected people are to receive four weeks of pay on dismissal, plus an additional week for every year they have served at the company.
Now what
These two developments were obviously too much for Stifel analyst Scott Devitt to stay positive on Carvana stock. Wednesday morning, Devitt downgraded his recommendation on the shares to hold from the previous buy. In the process, he took a machete to his price target. He now believes the stock is worth $40 per share, well down from the former $115.
Devitt also feels that the company's financial situation will worsen. "We are further reducing our estimates for Carvana's retail and wholesale vehicle sales, and our revised model suggests that the company will need to raise incremental capital relative to its existing liquidity resources before reaching breakeven," he wrote in a new research note.
