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Use car retailer Carvana is under Wall Street focus as, after Evercore ISI's bullish note yesterday, Bank of America has also chimed in. Carvana, whose shares are up by 194% over the past 12 months has further room to grow, according to BofA, as the US economic climate starts to shift with Federal Reserve's interest rate cuts on the horizon. The bank believes that the normalization in the US used car market from lower rates and price stability will allow Carvana to capitalize well on its dominant role in the industry.
Carvana Stock Up In Pre Market As BofA Reinstates Coverage, Adding To Yesterday's Gains
In its analyst note, BofA reinstated Carvana's stock and set a Buy rating along with a $185 share price target. This prices in a hefty 21% upside to Carvana's shares over yesterday's close, which saw the stock gain 7% after Evercore ISI's bullish coverage. BofA's note shared that the firm is capable of "sustained long-term growth" as it benefits from its leadership position and consolidated operations in a "fragmented $800B+ market."
Carvana benefits from its online only business model and sells cars to customers through its vending machines scattered throughout America. This enables it to reduce operating costs and create a differentiated brand model. Its used car market, according to BofA, "is recovering as prices normalize, car supply returns, and rates begin to fall."
The bank believes that used car sales in America have the potential to recover to levels reached before the coronavirus pandemic. The impact of high interest rates on demand has led to a price slump over the past two years, with inventory jumping to 2.27 million units in May despite a 6% price drop.
It adds that Carvana's "efficiency gains and a relatively large fixed-cost base vs. internet" will help the firm as the used car market accelerates to pre pandemic levels. A similar sentiment was echoed by Evercore ISI in its note yesterday that increased the share price target to $157 from $142, as it noted that Carvana could improve its margins by as much as 3% due to its infrastructure.
Evercore highlighted a "positive catalyst path for the next one and a half months which could include a potential beat and raise for the third quarter." Carvana's shares had jumped by 13% in July after its second quarter earnings saw the firm rake in $3.41 billion in revenue and $0.14 in adjusted earnings. These had beaten analyst revenue and EPS estimates of $3.25 billion and -$0.26 and allowed the firm to grow its sales by 15% annually.
Crucially, Carvana's adjusted operating margin of 10.4% was the highest among its peers. Evercore added that Carvana's management was focused on "delivering a great customer experience to drive sustainable share gain while eliminating pain points along the way." These comments were made after analyst Michael Montani met with the firm's CEO and CFO.
About the author: Ramish is a seasoned technology writer and editor with more than a decade of experience. He specializes in semiconductor fabrication and market analysis. With a background in finance and supply chain management - via his bachelors in Finance and a micromasters in supply chain management from MIT - Ramish combines financial rigor with deep industry insight to deliver accurate and authoritative coverage.
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