Text size
Carvana canceled a planned $1 billion debt swap last month.
Mark Ralston/AFP/Getty Images
Carvana stock was falling Thursday after a streak of gains in the last couple of months that appeared to have squeezed short sellers. Analysts at J.P. Morgan turned cautious on the stock, downgrading it as they argue the valuation has surged beyond the level justified by improvements in the used-car retailer’s business.
The analysts downgraded their rating on
Carvana
(ticker: CVNA) to Underweight from Neutral, with a target price of $10 in a research note. Shares of Carvana were down 5.8% in premarket trading at $36.65. However, that leaves the stock still more than five times higher than where it traded at the beginning of May, around $7.
That rise looked to have partly been fueled by a short squeeze, as short sellers were forced to close their bets against the company. S3 Partners, which S3 Partners, which tracks data on short selling, identified Carvana as a stock potentially at risk of a short squeeze earlier this year. Thursday’s fall could come as a relief for some—short interest still represented 49% of Carvana’s freely traded shares at the end of June.
The J.P. Morgan analysts acknowledge a series of recent positives for Carvana, including reducing its cash burn and significantly raising its earnings outlook. However, they note that its current enterprise valuation is around 35 times its expected operating profit in 2025, suggesting shareholders are betting on a stronger-than-anticipated return to growth.
“While positioning and funding outcomes could still dictate near-term direction of shares…we see valuation ultimately catching up to fundamentals and related forward earnings power,” the analysts wrote in a research note.
They add that Carvana would still ideally arrange a debt-for-equity swap, taking advantage of the run up in its shares. Carvana canceled a planned $1 billion debt swap last month, after failing to garner the support of investors who held the majority of its nearly $6 billion in unsecured bonds.
Write to Adam Clark at [email protected]
Source: https://www.barrons.com/articles/carvana-stock-short-squeeze-price-94fc76d3?siteid=yhoof2&yptr=yahoo