February 4, 2023

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Carvana sinks while creditor Apollo-Pimco truce creates doubts in stock

Carvana sinks while creditor Apollo-Pimco truce creates doubts in stock

(Bloomberg) — Carvana fell Wednesday as Wall Street pessimism swept its stock after the online car dealer’s largest creditors signed a deal to work together in negotiations with the company.

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Its shares plunged a record 45%, stopping at least one volatility stop, after analyst Seth Basham of Wedbush cut his 12-month forecast for the stock by 89% to $1 and lowered it to an underperformance level. The move comes a day after Bloomberg News reported that Carvana’s largest creditors, including Apollo Global Management and Pacific Investment Management, signed an agreement to prevent creditor battles that have complicated other debt restructurings in recent years.

“These developments point to a higher probability of debt restructuring that could leave equity worthless in a bankruptcy scenario, or very vulnerable at best,” Basham wrote in a note to clients.

The company’s bonds have fallen to less than 50 cents on the dollar in recent weeks, a sign that traders believe there is a high probability they will default. Carvana’s $3.3 billion bond due in 2030 is trading at about 42 cents, down from 79 cents at the start of the year.

It is the second time in almost two months that Basham has lowered his rating on Carvana. Back in October, he downgraded the company to neutral and lowered his price target to $15 from the $50 he had previously set. As recently as January, his 12-month price target on the stock was $300 a share.

Basham isn’t entirely alone in his latest stock call, either. About a month ago, Morgan Stanley analyst Adam Jonas withdrew his assessment of Carvana after missing earnings and saying it could be less than $1. The average 12-month analyst price target for the company is down 95% this year and is now just over $17, down from more than $361 at the start of January. However, this is about 350% higher than its current price.

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Wednesday’s plunge adds to what has been a painful turn for investors. Shares of the company are up more than 160% in 2020 as it benefited from a boom in used-car demand during the early months of the pandemic. But as supply chains have returned to normal, prices have plummeted, as have Carvana’s profit margins. That, coupled with a slowing economy, tightening monetary policy and continued liquidity burn quickly soured investors.

The Arizona-based company has seen its shares drop nearly 99% in the 16 months since it closed at a record high of $370.10. The decline wiped out nearly $60 billion in market value and left Carvana the second-best performing US stock with at least $500 million during that stretch.

For investors, the $1 price target is a stern reminder that despite massive declines, more downside is still possible. Carvana shares would need to fall another 85% from Tuesday’s close in order to reach the $1 level.

(Stock price action updates.)

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