Shares of Carvana (CVNA 6.23%), a leading online retailer of used vehicles, jumped over 15% higher Monday as of 3 p.m. ET, starting the week off on a positive note. The company's stock price has been on a roller-coaster ride since the beginning of the COVID-19 pandemic. Here are the details driving Carvana shares higher Monday.
The good news for Carvana investors is that Piper Sandler's analyst, Alexander Potter, believes the used car retailer is undervalued and has sizable upside at these prices. Potter upgraded Carvana's stock from neutral to overweight (meaning: buy), and while he cut Carvana's price target from $98 per share down to $73 per share, that still suggests the online retailer's current price of $41 is grossly undervalued.
"Before we get to the punchline, please note that yes, we are aware that used vehicle prices are falling," Potter wrote to investors. "We know that rising interest rates are a risk, and we know that bankruptcy is a real possibility."
Potter suggested Carvana shares "could easily continue falling, but with so much potential upside, we think investors should consider owning at least some CVNA."
While today's vote of confidence from Piper Sandler and Carvana's 15% jump in price are a welcome change of pace, the company is still a long way from being the "pandemic winner" it was when shares soared roughly 300% between January 2020 and August 2021.
However, the upgrade serves as a stark reminder that just as Carvana may have been overvalued during the pandemic, it could be equally undervalued (meaning: sell or don't buy) today.
One thing management must do going forward is to stabilize and consistently improve on Carvana's gross profit per unit (GPU), which has been more inconsistent with volatile used car prices and sales, and higher reconditioning and transport costs.
If Carvana continues to sequentially improve GPU, as it did during the second quarter, Potter's vote of confidence that the retailer is undervalued could gain more traction.