What happened
Shares of Carvana (CVNA 8.79%) were down by close to 35% as of 11:40 a.m. ET on Wednesday after Wedbush analyst Seth Basham downgraded the stock to underperform over the company's bankruptcy risk.
A weak environment for vehicle sales has put pressure on the company's financials this year, causing the stock to fall sharply, and investors don't see an easy way for Carvana to steer its way out of this mess.
So what
Basham's downgrade came after Bloomberg broke the news late Tuesday that a group of creditors holding the majority of Carvana's debt have joined together to negotiate with the company. The analyst believes a debt restructuring will leave the stock worthless in a bankruptcy situation.
Inflation, a weak economy, falling vehicle sales, and falling used car prices have created a perfect storm for Carvana. Its lower revenues are putting stress on a business that is saddled with $6.5 billion of net debt.
With revenue down, the company is spending cash to fund operations that it can't afford. Through the first nine months of 2022, Carvana's interest expense tripled year over year to $333 million, which could put the company in a cash crunch.
Now what
The Wedbush analyst set a price target of $1 for the stock -- around 85% lower than Carvana's Tuesday's closing price of $6.71, and still well below the $4.32 it was trading at as of 11:40 a.m. ET Wednesday. Long-term investors are usually well-advised to not put too much weight on analysts' ratings, which are heavily weighted toward short-term performance targets. But this is an analyst call worth paying attention to.
Carvana is now down by more than 98% from its peak, but investors should tread carefully before calling the stock a bargain. The company not only has weak financials ahead of a possible recession, but it also faces stiff competition from the likes of CarMax, which is a very profitable business, and other car dealerships that are investing in home delivery.
