Carvana Drops as a Longtime Bull Raises Doubts on Online Used-Car Stocks

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A Carvana car-vending machine in Huntington Beach, Calif.

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Mark Ralson/AFP via Getty Images

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After three years of recommending Carvana and other online dealers in used cars, Wells Fargo analyst Zachary Fadem downgraded the stocks to the equivalent of Hold on Tuesday. He pulled his price target on Carvana stock from $150, to $65.

,[M]acro headwinds are building, access to capital is dwindling, and appetite for high growth, [free cash flow] negative companies is becoming increasingly scarce,” wrote Fadem in his downgrade note. In addition to moving Carvana (ticker: CVNA) from Overweight to Equal Weight, the Wells analyst similarly downgraded Vroom (VRM) and Shift Technologies (SFT).

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One catalyst for Fadem’s downgrade of Carvana were what he called unfavorable terms on junk bonds that the company recently sold to finance its acquisition of the car auctioneer Adesa.

As scarce supplies of used cars began to drag on Carvana’s growth, and investors tired of waiting for profits, the stock slid from an August 2021 peak above $376 to a Monday close of $60.47. The stock was down a further 4.2% to $57.94 on Tuesday afternoon.

Fadem wrote that he remains bullish on Carvana’s long-term opportunity, and thinks it can become the largest, most profitable used car retailer in the country. But he thinks investors won’t warm to the shares until the company produces cash flow. Meanwhile, said the analyst, Carvana is earning narrower gross profits on the cars it sells as it struggles in the face of high car acquisition prices, rising rates, and waning consumer demand. The same factors will weigh against Shift and Vroom, he said.

Write to Bill Alpert at [email protected]

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Credit: www.marketwatch.com /

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