Morgan Stanley says stay away from Carvana as used-car seller still has a lot to prove

Published Fri, Aug 11 20238:44 AM EDTUpdated Fri, Aug 11 202312:24 PM EDT

Although Carvana raised its guidance for the third quarter, Morgan Stanley still sees a shaky path forward for the used-car retailer. Analyst Adam Jonas maintained his underweight rating on the stock and raised his price target by $2 to $37, which still suggests that shares stand to lose 6.2% from where they closed Thursday. "Significant challenges remain with respect to the used car consumer and the viability of CVNA's long term business model," Jonas wrote in the note. "Even considering our expectation of continued recovery in the business and less bearish views on the used car market, the stock's reward-skew and downside to PT keeps us UW." Carvana said it expects its third-quarter adjusted core profit to be above $75 million from its prior forecast of positive adjusted EBITDA, while the consensus call from FactSet was $46.4 million. The used-car seller is up more than 750% this year and nearly 11% in August. A chunk of those gains comes from short sellers covering their bets against the company. Carvana announced a deal last month with noteholders to reduce the company's total debt outstanding by more than $1.2 billion. Carvana shares got crushed last year, losing more than 97% as higher prices for used cars pressured the company. The analyst expects some fundamental gains in Carvana's retail segment, including: Normalizing retail inventory turn times, with the company's average days to sale (the number of days between acquisition and sale of a car) expected to decrease in the third quarter Improving costs by in-sourcing, logistics network utilization and lower inbound transport distance Expanding buying cars from customers, with the customer-sourcing share target at low to mid 80% of Carvana's sold retail units Generating additional revenue streams from value-added services, such as fulfillment and logistics network "Our 3Q company-defined adj. EBITDA estimate is now at $75mn vs. $27mn previously, in line with guidance, driven primarily by higher [gross profit per unit] and increased depreciation given used car declines posted in Manheim thus far this quarter," Jonas said. Still, Carvana "has a lot to prove, in our view," according to Jonas.