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It’s time to pull back on Carvana after its shares shot up this year, JPMorgan said. Analyst Rajat Gupta downgraded the used car e-commerce platform to underweight from neutral. Gupta’s $10 price target means he thinks the stock could fall 74.3%. Shares slid 4.6% in premarket trading. The stock has skyrocketed more than 700% in 2023 after losing nearly 98% of its share value in 2022, as investors weighed the likelihood of bankruptcy. “We believe valuation has once again disconnected materially from fundamentals,” he said in a note to clients Thursday. CVNA 5Y mountain Carvana shares in recent years For the past nine months, Gupta said investors have looked more at Carvana’s liquidity and ability to get through a potential recession than the long-term business model. This period has brought cuts to selling, general and administrative expenses as well as improved asset-backed security spreads and a resilient pricing market for used cards, he said. In turn, that’s meant the company has managed slow cash burn with near-term EBITDA revised higher and has been able to improve its liquidity and mitigate bankruptcy concerns. Gross profit per unit has been higher than normal in the near-term given the cost cutting, he said. JPMorgan raised its non-GAAP EBITDA and gross revenue per unit expectations for the 2023 through 2025 fiscal years. Last month, JPMorgan said the company should still consider an equity raise to further reduce concerns. The rally would help offset any arguments that a raise could dilute equity. The bank still thinks an ideal outcome would involve a debt and equity exchange, particularly one that looks to the 2030s, which could reduce risk on the second half of the 2020 decade. The issue with Carvana’s story, according to Gupta: Investors are anticipating a stronger return to growth and leverage in 2024 than will actually take place. He said there’s little hope for what’s baked into the stock to be right given supply challenges, little pre-cut comfort in the selling, general and administrative expense space and the continued risk of gross profit per unit levels moderating. And a return to growth should not be a positive catalyst, he said, given that a double-digit unit compound annual growth rate for 2024, 2025 and 2026 is already priced into the stock. Focus will instead be on long-term unit and margin targets, Gupta noted. — CNBC’s Michael Bloom contributed to this report.
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