Carvana estimates are too optimistic, Jefferies says in downgrade

Shares of Carvana (NYSE:) fell fractionally in pre-open trading Monday after analysts at Jefferies downgraded shares to a sell-equivalent rating, saying the company is not out of the woods yet and Wall Street estimates are too high.

The analysts cut their rating on the stock to Underperform from Hold and slashed the price target from $55 to $30 per share, suggesting nearly 32% downside from Friday’s closing price.

“Consensus appears to overestimate the sustainability of recently elevated profitability, which we believe benefited from transitory tailwinds that will abate in the coming quarters,” the analysts commented. “Our revised ’24 GPU/EBITDA are ~10%/45% below the Street, despite us assuming per unit economics remain well above prepandemic levels.”

They noted that temporary tailwinds have boosted current profitability with record-high Retail and Other Gross Profit per Unit (GPU) in 2Q23, double the levels from last year and pre-pandemic (vs. 2Q22/2Q19). However, overly optimistic street estimates for ’24/’25 incorporate inflated total GPU, about 30% (or ~$1,100/unit) above the 5-year average and ~75% (or ~$2,100/unit) above pre-pandemic levels (’19). These transitory tailwinds, such as wider wholesale/retail spreads and loan sale timing, are expected to normalize in 2H23. Anticipated Unit growth next year might negatively impact per unit economics.

The firm’s estimates show Retail/Other GPU moderating by ~$100/unit in ’24 but remaining ~$500/unit above pre-pandemic (’19) levels due to some structural improvements, resulting in total GPU falling ~10% below consensus. Additionally, SG&A/Unit plateaued for three quarters, indicating limited per unit expense improvements until growth accelerates, leading to their ’24 EBITDA estimate falling ~45% below consensus.