What happened
Shares of the original car vending machine company, Carvana (CVNA 0.65%), put the pedal to the metal this morning, racing ahead 7% through 11:55 a.m. ET.
You can thank Citigroup for that.
NYSE: CVNA
Key Data Points
So what
In a note out this morning, investment banker Citigroup announced it is doubling its target price on Carvana stock, from $5.50 per share to $11 -- but not shifting its recommendation even a single gear, leaving Carvana instead in "neutral."
Last week, if you recall, Carvana disappointed investors mightily with a Q4 earnings report that showed ... well, it actually showed no earnings at all, but rather a quarterly loss of $7.61 per share -- more than 7x as bad as what it lost a year ago, and much worse than analysts had predicted. Carvana's stock promptly plunged more than 20%.
And yet, Citi seems undismayed.
While admitting that Carvana missed estimates last week, Citi pointed out that going forward, Carvana management is focused on cutting costs and reaching positive free cash flow (a goal that has so far eluded the company). Citi applauds this approach of emphasizing "profitability over growth," as StreetInsider reports today.
Furthermore, Citi isn't quite ready to write off Carvana just yet, preferring to give the broader automotive market some time to sort itself out post-pandemic and to give sales volumes and sales prices time to normalize before deciding whether Carvana will be able to make a profit in a more normal car market.
Now what
But here's the thing: Carvana already had several years of operating in a normal, pre-pandemic car market before COVID-19 came along. Indeed, established in 2012 and reporting financials since 2014, Carvana failed to earn any profits in that year -- or in 2015, 2016, 2017, 2018, or 2019 either.
Granted, its losses grew in the pandemic years of 2020-2022, but you can't really say that the pandemic caused those losses when Carvana had already been losing money for nearly a decade. Similarly, it seems unlikely that a return to "normal" for the car market is going to mean a sudden swing to profitability for Carvana, now that COVID-19 is beginning to fade away.
Perhaps this is why, even as Citi doubles its price target (just to keep pace with the rising stock price), the analyst remains reluctant to actually recommend buying Carvana stock.
Truth be told, I'm pretty reluctant about recommending that, myself.
