Wait for a better opportunity in Carvana stock: Citi

Investing.com -- Citi analysts reaffirmed their Neutral/High-Risk rating for Carvana Co (NYSE:CVNA ) stock while hiking the price target to $195 from $125.

The moves come on the heels of Citi's analysis of proprietary retail unit tracking data, which suggests that Carvana's third-quarter sales for 2024 are tracking approximately 2% above consensus estimates.

The projected sales are around 107.8 thousand units, marking a 33% year-over-year increase and a 6% quarter-over-quarter rise compared to the consensus of roughly 106 thousand units.

“As a result, we are raising our units, GPU, and EBITDA projections for 3Q24 and beyond to reflect Carvana’s strengthening Retail unit demand, growing inventory, and continued efficiency gains,” Citi analysts said in a Thursday note.

“On efficiencies, we are impressed with Carvana’s expanding GPU enabled via fundamental improvements across is operations and believe more gains are ahead,” they added.

However, while being incrementally bullish on Carvana stock amid rising demand and expanding margins, analysts said they still prefer to stay on the sidelines but “would be opportunistic around any material pullback in shares.”

Citi's updated model for Carvana reflects stronger retail unit demand, growing inventory, and continued operational efficiencies.

The firm is impressed with Carvana's expanding gross profit per unit (GPU), which has been enabled by fundamental improvements across its operations. Analysts expect further gains in this area.

The firm projects Carvana will sell about 107.3 thousand retail units in the third quarter of 2024, a 32.5% year-over-year increase and a 5.8% rise from the previous quarter. This forecast leverages Citi's proprietary daily tracking of unit sales through early September and accounts for seasonal trends.

“Notably, our tracking suggests inventory is expanding, which we believe should attract greater demand and increase conversion rates,” analysts noted.

Citi also notes that while retail GPUs are projected to decline quarter-over-quarter in the third quarter, this is attributed to Carvana's strategy of passing efficiency gains to consumers to enhance user experience and drive conversions. Carvana has already delivered significant benefits from identified GPU improvements in the second quarter of 2023.

Looking at profitability, the firm observes that non-GAAP selling, general, and administrative (SG&A) expenses have remained relatively flat over the past 1.5 years. With this stability, Citi projects EBITDA margins for Carvana will consistently fall within the company's long-term target range of 8-13.5% going forward, signaling early stages of profit expansion.

Source: Investing.com