: Carvana’s stock ‘second chance’ is already priced in, Morgan Stanley says

Carvana Co.’s stock deserves to rally after the company’s “stronger” quarterly results and improvements in capital structure, but the auto retailer’s “second chance for success” is already priced in, analysts at Morgan Stanley said in a note Thursday.

The analysts, led by Adam Jonas, downgraded their rating on Carvana shares
CVNA,
-7.59%

to the equivalent of sell, saying that they think “much of the rally is deserved but the stock has run well above our increased target, driving a less favorable risk-reward.”

Carvana last week reported stronger-than-expected second-quarter results, and crucially struck a debt-reducing deal with its bondholders aimed at bolstering liquidity. Shares of Carvana have skyrocketed more than 750% this year, making the S&P 500 index’s 19% advance look paltry in comparison.

See also: Carvana’s stock has roared back from the brink. This chart shows its meteoric surge.

“Carvana achieved its first step toward a self-financing future” by posting a positive adjusted EBITDA, higher-than-expected retail gross profit per unit, and lower-than-expected selling and general expenses, the analysts said.

See also: Carvana’s debt restructuring is good news, but its losses are ‘hardly in the growth stock handbook,’ analyst says

“In addition to pushing out liquidity concerns short term, the company must demonstrate they can sustain their progress,” however, they said.

“Investors will look to whether the improvement in [the second quarter] can be replicated, whether sufficient structural changes have been made to avoid negative operating leverage upon scaling unit volumes again, and whether the debt restructuring is sufficient to stave off liquidity concerns.”

For al that Carvana executives deserve “credit” for executing on cost saving and taking a decisive action to provide “significant” financial breathing room, challenges remain, the Morgan Stanley analysts said.

Those concerns include questions about the used-car market and even the “viability of [Carvana’s] long-term business model. “

“Even considering our expectation of continued recovery in the business and less
bearish views on the used car market, the stock’s reward-skew” plus an implied 20%
downside to Morgan Stanley’s $35 price target moved the stock rating to sell, the analysts said.

This post was originally published on Market Watch

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