One e-commerce stock just blew through every Wall Street analyst target. It is now the second-best-performing stock on the market this year out of nearly 4,000 that have market caps of more than $300 million.
What is this household name that has jumped more than 400% this year? I'm talking about Carvana (CVNA +2.87%), the online used car dealer that had fallen as much as 99% from its peak in last year's crash. The reasons behind Carvana's plunge were many. Used car prices fell back from all-time highs, sales slowed, and interest payments rose as the Fed hiked interest rates.
After telling investors that it would report adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $50 million in the second quarter, the stock surged 56% on Thursday, passing even the most bullish Wall Street target along the way.
Image source: Carvana.
What Wall Street is saying
At a share price of more than $25, even the Street-high price target of $21 from Piper Sandler's Alexander Potter calls for it to drop 18%. In a note following the release of Carvana's first-quarter earnings report in May, Potter reiterated his overweight rating and raised his price target on the stock from $20 to $21, saying that the company is "coming back from the brink" and argued that there is a lot of room for upside if trends continue. He also believed the company would avoid bankruptcy, a devastating outcome that many investors have been betting on.
Carvana's biggest bear, on the other hand, is Wedbush's Seth Basham, who gives the stock an underperform and a price target of just $1, effectively calling for it to go bankrupt. Most recently, Basham gave the company credit for securing a good price for its recent round of car loans, which he said would boost Q2 EBITDA "materially higher" -- however, that wasn't enough for him to improve his outlook on the stock. Basham believes that a large restructuring is the most likely outcome for the stock.
So is Wall Street right, or can Carvana keep up this year's surge? Let's unpack what's happening with the company right now.
Why Carvana is so hard to value
Wall Street analysts tend to arrive at their price targets based on valuation models. They forecast cash flow growth and then discount it back to get the present value of future cash flows, or what they consider the company's fair value.
Carvana, which is attempting to turn around its business by slashing inventory and costs, is at a stage where it's very difficult to predict, and thus appropriately value -- which is one reason why the stock has been so erratic this year, despite its massive gains. That explains why the stock surged 56% on Thursday after the company told investors that it would report at least $50 million EBITDA in the second quarter. Analysts, on the other hand, had forecast an EBITDA loss of $6 million, showing Carvana is improving that key profit figure much faster than expected.
The other factor that's causing the stock to be so volatile is the high percentage of shares sold short. As of mid-May, nearly 70% of the float has been borrowed by short-sellers, which has led to a number of short squeezes in the course of its bull run this year.
NYSE: CVNA
Key Data Points
The upside outweighs the downside
Despite its push into overall EBITDA profitability, Carvana's overall numbers are still ugly. The biggest problem for the company is the $6.8 billion in debt it owes, which led to $159 million in interest expense in the first quarter, or more than $600 million annualized -- which is not factored into EBITDA, but a very real cost.
The good news for the company is that the positive EBITDA will help it service that debt, and eventually help it pay it down, assuming it can keep growing EBITDA.
Carvana still faces many risks, but management has shown an ability to improve profitability faster than expected, and the market is likely to reward the company as it makes improvements. After years of valuing revenue growth above all else, it's shifted its focus to profitability and is managing inventory accordingly.
Expect the stock to continue to be volatile, but the upside potential still outweighs the downside risk here.
