RBC Capital has run out of reasons to remain bearish on Carvana (NYSE:CVNA), reflecting on the company’s ability to access capital with a higher share price and “clear improvement in the unit economics (that) has simply taken most risks off the table.” In respect of RBC’s new outlook for the company, the firm upgrades Carvana (CVNA) to Sector Perform from Underperform and doubled its price target to $90.
So what’s changed, RBC asks? The company’s management has done a good job of “managing expectations” and before aiming for more meaningful growth, Carvana (CVNA) intends on driving still further gross profit per unit and fixed cost leverage. Also, the Street might have over-estimated the company’s cash burn per car, and RBC notes that after spending time with the company it appears “further adjustment below the operating cash flows is necessary to reflect steady state operations” with modest cash burn forecasted in Q3 and cash generation per car possible by Q4 this year.
Finally, Carvana (CVNA) has made improvements in car profitability that will help the company pay down $7.4B in debt (owed over 7 years). Coupled with a higher share price that increases access to capital, any lingering future liquidity concerns are reduced.
While the stock remains heavily shorted, any return to more meaningful unit grow will be reflected in the stock and amplified by short-covering, says RBC Capital analyst Brad Erickson, with the possibility of the share price reaching $100, a 26% premium from Thursday’s close.
Carvana (CVNA) shares are up 5% in Friday’s premarket trade.