What happened
Shares of the online car-buying platform Carvana (CVNA -6.88%) were volatile today after another analyst downgraded the company's stock.
BofA Securities analyst Nat Schindler cut his rating to neutral from buy and cut his price target for its shares to $10, down from $43.
As a result, the stock sank by as much as 7.5% today, but it rebounded later and was up by 2.7% as of 2:17 p.m. ET. The bounce was likely caused by positive comments made by the Federal Reserve indicating that smaller interest rate hikes could start in December.
Image source: Getty Images.
So what
Schindler wrote in a research note to investors that "Carvana has been struggling to turn profitable" as it spends $600 million in annual interest expenses and is "burning through cash quickly."
His downgrade of the stock comes after Moody's lowered Carvana's debt rating to negative just last week.
"We now believe that without a cash infusion, Carvana is likely to run out of cash by the end of 2023," Schindler said.
He added that it's impossible to predict if there could be a possible cash infusion for the company at this point, and wrote that there's no indication yet that the company will receive one.
All of this sent Carvana's share price plunging for most of the day, but it recovered later in the trading day after Federal Reserve Chairman Jerome Powell said, "The time for moderating the pace of rate increases may come as soon as the December meeting."
The Fed has raised rates by 75 basis points at its last several meetings, and investors have been hoping that officials would slow down the severity of hikes soon. Although Powell's comments indicate that the Fed will do just that, officials are still committed to raising rates to bring down inflation.
Carvana's investors are likely reacting Powell's comments very positively because higher interest rates have increased the borrowing costs for car buyers, which has affected the company's sales.
Now what
Schindler's downgrade and comments are the latest blow to Carvana's stock, which has received a series of downgrades from analysts over the past couple of weeks.
Even with the slight increase in share price today, Carvana's stock is down a staggering 96% year to date. And with the company burning through cash right now, investors should likely steer clear of this stock.
