Wedbush downgrades Carvana, sees stock dropping to $1 as bankruptcy risk rises

Published Wed, Dec 7 20228:14 AM EST

Bankruptcy is becoming more likely for beaten-down car seller Carvana , according to Wedbush Securities. Analyst Seth Basham downgraded the online used car retailer's stock to underperform from neutral and slashed his price target to $1 from $9 per share. That's 85.1% down from where it closed Tuesday and 99.7% off its pandemic closing high of $360.98. The downgrade came after Bloomberg News reported that a group of creditors including Apollo and Pimco agreed to unify in restructuring agreements. Basham said the move will help quell any infighting among stakeholders, which he said has plagued similar negotiations at other companies. He also said the stock's bonds have been trading at around 50 cents on the dollar, which indicates investors see a "high probability of default." "We believe these developments indicate a higher likelihood of debt restructuring that could leave the equity worthless in a bankruptcy scenario (pre-packaged or otherwise), or highly diluted in a best case," he said in a note to clients Wednesday. The stock fell 19.8% in premarket trading after sliding 5.5% Tuesday. Basham said a restructuring would allow to company to bring down its annual interest expense burden of more than $600 million. It would also help reduce assets and costs as the company works toward profitability. A bankruptcy was less likely before the news because one family owns 40% of equity, he said, which would make it difficult for ununified debt holders to have a bigger say. The $2 billion in owned real estate also made Basham think the company could instead turn to real estate sales to raise capital, but he said there now appear to be roadblocks with that strategy. It's the latest news in a year that's pummeled the car platform's share value. In 2022 alone, the share value has dropped 97.1% from where it began the year. Basham said the company has an "albatross around its neck" from its acquisition of Adesa's U.S. physical auction business earlier this year as it added $336 million of incremental annual interest expense and unneeded additional reconditioning capacity. Carvana laid off 1,500 employees, or 8% of its staff , last month following concerns over the company's long-term strategy amid a weakening used vehicle market. — CNBC's Michael Bloom contributed to this report.