bullish on Carvana’s business model despite macro headwinds
Carvana (CVNA) stock has been trending steadily down from mid-2021 highs, with declining earnings keeping the online used-car retailer in a share price rut. Slowing demand and cooling used car prices also paint a murky road for Carvana, as the company’s growth during the pandemic has been spurred by soaring used car sales and prices across the country. stronger from COVID.
Despite these macroeconomic headwinds and Carvana’s recent lackluster performance, Bank of America (BAC) remains optimistic about the company’s business model.
“With the decision to acquire ADESA and the resulting costly debt buildup, investors appear to have largely abandoned this once-high stake (the stock is now down 90% from its August 21 high). ),” BofA Global said on May 18. Research report reads. “However, we still believe in Carvana and its desirability for one glaring reason: it is, in our opinion, a fundamentally better way for consumers to shop and buy used cars.
BofA maintains its Buy rating on Carvana shares with a price target of $80, down significantly from its previous price target of $225. Shares of the company are currently trading around the low to mid $30 range today.
Carvana’s $2.2 billion acquisition of ADESA’s physical auction business in the United States – a deal in which Carvana took over 56 ADESA sites in the United States totaling approximately 6.5 million feet squares of buildings – serves to add another source of income and a network of physical sites aimed at strengthening the operational capacity of Carvana. The acquisition was completed on May 9 and BofA believes the deal has helped ADESA grow from 1% to 8% market share.
“The new network will allow Carvana to have an inspection center within 200 miles of 94% of the US population,” the report said. “Capacity is the main constraint for its business, so this acquisition should enable Carvana to displace up to 8 times its current annual units once fully built.”
Ultimately, BofA says the change in market sentiment on Carvana was driven by dynamics beyond the company’s control, such as the slowdown in the used-car market, as well as things that were under its control, such as the outsized growth in employees and compensation last year. which caused operating expenses per unit to skyrocket. Earlier this month the company announced job cuts of around 2,500 – 12% of its previous total – in a bid to tackle its overcapacity issues amid slowing auto volume .
Carvana estimates that the layoffs will result in an annual reduction of $100 million in selling, general and administrative expenses and $25 million in the retail cost of goods sold. Going forward, the company will need to make significant cost reductions and maintain sales growth if it is to keep up with its competitors in online used car retailing.
“Throughout COVID-19, Carvana has seen rampant costs in an effort to meet demand and skyrocketing growth,” the report said. “In a recent corporate update (CVNA Business Update), management announced a variety of cost reduction measures that are expected to drive SG&A spending per unit to approximately $4,000 in 2022. , in line with competitors such as CarMax (KMX). The mid-term goal is $3,000 SG&A per unit, which is achieved through significant reductions in compensation and benefits, advertising and logistics costs.
Thomas Hum is a staff writer at Yahoo Finance. Follow him on Twitter @thomashumTV
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