Shares of Carvana Co. took a hit on Thursday following a remarkable rally this year. J.P. Morgan analyst Rajat Gupta recommended that investors sell the stock, stating that it has “disconnected materially” from fundamentals once again. Gupta’s rating was downgraded to underweight after being neutral for the past eight months. This downgrade comes after he expressed similar concerns about valuation back in August 2022.
In premarket trading, Carvana’s stock (CVNA) dropped by 4.0% after experiencing a 60% surge over the past four days, reaching its highest point in 10 months by the end of Wednesday.
The stock has seen a staggering increase of 315.1% in the past three months and a soaring 720.5% year-to-date. In comparison, the S&P 500 index has gained 7.9% over the past three months and 16.5% so far this year.
Gupta noted that Carvana investors have been primarily concerned with liquidity and the ability to sustain duration through a potential recession, rather than focusing on the underlying fundamentals of the company. Despite this, Gupta acknowledged that Carvana has made significant cost cuts, improved credit conditions, and reduced cash burn, which have contributed to a more favorable liquidity profile and alleviated concerns about bankruptcy.
However, Gupta believes that the current stock price reflects an excessively optimistic outlook for Carvana’s future growth prospects. He expresses minimal confidence in this anticipated growth due to industry supply challenges, affordability issues, and potential declines in gross profit per unit (GPU). Gupta does not believe that Carvana’s decision to return to growth will act as a catalyst for driving up the stock price since consensus and investor expectations already assume double-digit growth in the coming years.
In conclusion, Carvana Co.’s stock has suffered a setback as J.P. Morgan’s Rajat Gupta downgrades the rating, emphasizing the disconnect from fundamentals and expressing doubts about the company’s future growth potential.