Six months after Morgan Stanley pulled its rating on Carvana shares, the firm says it has “improved confidence” in the used-car dealer. Analyst Adam Jonas reinstated coverage of the stock, giving it an equal-weight rating. His price target of $12 implies just 3.6% upside from where shares closed on Monday. Meanwhile, the stock was down more than 5% late Tuesday morning. The analyst’s bear case for the stock anticipates a drop to a valuation of $1. However, in his bull case, shares could pop to $60, a jaw-dropping jump of more than 400% from the previous session’s close. “While the stock still offers a wide range of potential outcomes, we have improved confidence in management’s ability to mitigate operational cash burn while passing through the worst of [the] used car market dislocation,” Jonas wrote in a Monday note. The analyst is optimistic on Carvana’s shift to a “shrink to grow” strategy. Carvana’s CEO Ernie Garcia III said during the company’s first-quarter earnings call that the company would focus on first obtaining positive adjusted earnings before interest, taxes, depreciation and amortization, as well as positive unit economics before reprioritizing growth. “Consensus revenue expectations have been reeled in materially,” Jonas said. “We believe that the market has sufficiently priced in, and is giving credit to, a more efficient and better operated smaller Carvana.” The analyst added that the company’s reductions of selling, general and administrative expenses have been progressing better than expected, marking a “turning point” for Carvana. “In their 4Q22 shareholder letter, Carvana outlined a plan to remove $100mn of Non-GAAP SG & A expense by the end of 1H. By the end of Q1, they had already cut $119mn. … We think that the fact that Carvana not only met their operating objectives, but did so a quarter early, is a turning point for the company, and adds to our increased belief in its outlook,” said Jonas. Carvana shares have soared nearly 130% in 2023. To be sure, the stock is still down by more than 71% over the past 12 months. CVNA YTD mountain Carvana stock —CNBC’s Michael Bloom contributed to this report.
