Carvana Raises Money Through Stock Offering
Carvana (NYSE: CVNA) insider CEO Ernest C. Garcia III and major shareholder Ernest C. Garcia II made very large purchases of company stock the week after Q1 earnings were released but don’t read too much into the news. While the purchases are a vote of confidence in the company there are a couple of red flags that sap strength from the support. To start, the purchases are offset by a secondary stock offering that is worth far more than what they purchased. To make matters worse, the total purchases, at least so far, are less than what they indicated they might buy so a disappointment in that regard. Regardless, insiders hold nearly 18% of the company and have plenty of skin in the game so it's hard to fault them for the shortcoming.
The institutions have also been buying shares, netting more than $2 billion over the last year. The total institutional ownership including large shareholders is over 88% making this a very tightly held issue and one ripe for a short-squeeze given how high the short interest is. Short interest in Carvana is over 33% but short-covering may have already begun. If the market begins to move against the shorts, however, a squeeze is a very real possibility.
The Analysts Sour On Carvana
The analysts turned sour on Carvana following the Q1 earnings release due to margin compression and a darkening outlook for the used car business. While used car sales are still strong growth is flagging and margins are coming under pressure. What this means in regards to the analysts is that 12 of the 23 covering Carvana came out to lower their price targets and 1 of them downgraded to Equal Weight. Another analyst initiated coverage which might be good news except the stock was started at Underperform and without a price target.
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As it is, the Marketbeat.com consensus price target is still well above the price action at $190 which implies about 350% of upside for the stock. We don’t think Carvana will move up that much but it is trading at a long-term low while business is still sound so there is upside potential.
“We are downgrading to In-Line given a lack of visibility on expenses, incremental capital raise, and ongoing auto shortage demands headwinds,” analyst Michel Montani of Evercore ISI wrote in a note to clients. “Sometimes calls just don’t work out, and this is one of them with Carvana down from $126 when we upgraded in February.”
Carvana Grows Too Fast, Cuts Into Profits
Carvana had a good quarter, even a great one, but there were two factors that caused shares to slide in the wake of the report. The first is that, while revenue grew by 55.6% over last year, the results were mostly in line with the expectations, and no catalyst for higher prices. The second is the company had planned for higher sales volume in the quarter which resulted in higher fixed costs and lower margin. The good news there is that sales volume may pick up (Omicron and weather were cited among other factors) but macro headwinds like interest rates and inflation remain.
The Technical Outlook: Carvana Shares Halted, Short Squeeze In-Play
Carvana shares slid in the wake of the earnings report but the bottom may be in. Price action began to move higher on 5/12/22 and soon gained momentum and had to be halted twice intraday. At the peak of the morning session, price action was up more than 40% on what we believe to be a short-squeeze. In the near term, we expect to see more volatility in this stock. Longer-term, shares of Carvana may not do much but flounder at these levels until fundamental strength is once again displayed.
Companies in This Article:
| Company | Current Price | Price Change | Dividend Yield | P/E Ratio | Consensus Rating | Consensus Price Target |
|---|
| Carvana (CVNA) | $224.46 | +0.7% | N/A | 22,468.47 | Hold | $222.71 |
Experience
Thomas Hughes has been a contributing writer for InsiderTrades.com since 2019.
Areas of Expertise
Technical analysis, the S&P 500; retail, consumer, consumer staples, dividends, high-yield, small caps, technology, economic data, oil, cryptocurrencies
Education
Associate of Arts in Culinary Technology
Past Experience
Market watcher, trader and investor for numerous websites. Founded Passive Market Intelligence LLC to provide market research insights.
