The model for buying cars hasn't exactly changed a whole lot in the last 20 years or so. Or at least not until the whole coronavirus business hit the world. For most people, it was go to the lot, pick your car, pay and drive it home. With the arrival of Carvana (NYSE:CVNA), however, the market was forced to modify its tactics accordingly to keep up with this major new disruption. Now, the company gained 2% in pre-market trading as Jefferies Financial Group issued new, and very positive, word about the company going forward.
Trading Paint and Burning Rubber
Jefferies started coverage of Carvana only recently, but started it off in a very big way. Not only did the analyst issue a “buy” recommendation for the stock, but offered up a price target of $300 per share. That represents an upside of around 32%, using numbers from yesterday's close, which means Jefferies is expecting some big movement out of the company in the near-term.
Considering that the note to investors in which Jefferies initiated coverage was titled “A Shiny New Model That's Speeding Past Competition,” it's clear Jefferies is not only expecting big things, but has something to base those expectations on. Jefferies noted, as we did above, that the used car market is packed with opportunities for disruption, and Carvana's entire business model represents just such a disruption.
A Packed Freeway to Buy Town
Jefferies is not racing down this particular freeway on its own, however. The road to a buy decision is bumper-to-bumper at this point, as several other analysts are going Jefferies' way. Our latest research shows that Carvana has a consensus rating of “buy”, with huge changes over the last six months. Six months ago, the company had two “sell” ratings, 10 “hold” and 10 “buy.” Now, it's just one “sell,” and still 10 “hold”, and a hefty 15 “buy” ratings.
The price target has been redlining as well. Six months ago, it was sitting at $90.11. Today, you wish you could buy it at that price, because the consensus price target is more than double that at $212.50. Price targets have also been increasing from several analysts since late October. Six analysts raised their price targets on Carvana between October 30 and November 5.
Running on Most Cylinders
Things look positive for Carvana overall, though not without a few troubles. The company is currently carrying just over $1 billion in debt, which may have some concerned. The company's market cap of $38.73 billion, however, suggests that may not be that big a problem. There has also been a little selling off going on; just recently, our own research revealed that major shareholder Ernest C. Garcia II staged a sale of 24,600 shares of Carvana stock. There are several potential explanations for a move like this, however, from a simple portfolio rebalancing to a complete loss of faith in the company.
The aforementioned hiccups aside, things look very positive at Carvana right now. It's got a lot of positive analyst sentiment behind it and sufficient capitalization to act on its sentiment. The company is hiring new customer service staff, set to start working remotely in Iowa. It's also expanding operations into California, Virginia and more; Atlanta is poised to land one of the company's new “car vending machines.”
It's also taking a public stand against hidden fees, which have often been a problem in used car buying operations. Its “Live Feelessly” campaign is backed by digital and television advertising, and encourages customers to “seek pricing transparency” for their purchases, a point which will doubtlessly endear buyers to the Carvana way.
About the only problem with Carvana is that it depends on people buying cars. In an economic downturn—especially one marked by an increasing focus on staying home—car demand may not always be there. We've already seen how homebound customers turned to auto parts sales operations like O'Reilly (NASDAQ:ORLY) to repair current cars rather than replace them with new.
However, Carvana has worked aggressively to maintain its market share, pushing into the traditional lot-based market readily. Carvana's focus on vehicle delivery and contactless buying—it doesn't get much more contactless than vending machines—will certainly help with customers concerned about diseases and shopping. This poises Carvana to be a major part of the market going forward, and that's a proposition that's well worth buying in on.
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