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Needham sees bear case 'nearly obliterated' for this near-profitable retail name

Sep. 23, 2020 7:19 PM ETCarvana Co. (CVNA) StockCVNABy: Jason Aycock, SA News Editor3 Comments
  • The company's lost a bit of its bullishness this week - mainly on valuation, after a three-month rally where the price doubled - but Carvana (NYSE:CVNA) has drawn a new Street-high price target from Needham.
  • Shares fell 3.6% today, giving back a little bit of what ended up being a 30%-plus rally yesterday following a business update where it said it expected record metrics in Q3.
  • But Needham boosted its target to $265 from $200, suggesting it sees another 21% upside to come, with the bear case "nearly obliterated" as accelerating growth gives a glimpse of approaching profitability.
  • The company update pointed toward breakeven adjusted EBITDA for the first time, likely flummoxing bears who widely held the belief that Carvana could "barely show market-level cohort profitability, let alone companywide," Needham's Brad Erickson says.
  • GPU likely came in around $3,400, and longer term, the firm believes it can crest "well in excess" of $4,000/car.
  • And depending where GPU levels "ultimately shake out" with the November report, the firm says it will become increasingly clear that Carvana can keep reinvesting part of the GPU upside to drive stronger acceleration, especially as inventory ramps up.
  • Bears are hanging their hat in part on the appearance of a defensive capital raise amid burning cash. But "we think yesterday's glimpse towards profitability clearly indicates CVNA is raising because it can, not because it needs to," Needham says.
  • There's potential for near-term volatility based on the valuation perception, but Needham is basing its long-term thesis on the fact that "so long as fixed-income investors' desire for the predictable stream of cash flows from used-car loans persists, equity investors will increasingly realize that a digitally native, online marketplace is the most efficient car retailing enterprise of the future to drive loan origination growth for those FI investors."

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