Investing.com -- RBC (TSX:RY) Capital Markets on Monday upgraded Carvana (NYSE:CVNA) shares to Outperform, and lifted the target price to $280 from $270.
According to the firm’s analysts, following Carvana’s impressive turnaround last year, the recent stock pullback marks an appealing opportunity, leading to an upward revision in 2025 earnings estimates.
Carvana shares jumped 6% after the Tuesday market open.
RBC's upgrade is supported by four key factors, including an expected increase in retail unit sales as supply improves, confidence in the sustainability of gross profit per unit (GPU) levels, the potential of Carvana's marketplace opportunity, and anticipated balance sheet improvements.
The firm sees Carvana as an "unexpected compounder over time," citing the company's ability to capitalize on a supply-constrained business and a largely untapped total addressable market (TAM).
The firm acknowledges that skepticism exists among investors regarding the durability of volume re-acceleration and GPU sustainability. However, RBC believes that these concerns are manageable and that Carvana is on a clear path to generating real free cash flow (FCF).
RBC also notes that the company has begun addressing its 2028 debt maturity, which should help improve the perception of its balance sheet.
The investment bank has raised its retail unit estimates for Carvana above consensus, predicting approximately a 4% increase for Q4 and a 2% increase for 2025.
“We believe Street estimates under-estimate CVNA's market share ramp unless its major cohorts start underperforming relative to years of predictable development,” analyst Brad Erickson said in a note.
The upgrade also takes into account Carvana's potential for GPU growth through inventory expansion and delivery/logistics efficiencies. Moreover, the firm sees Carvana's retail marketplace becoming a more significant contributor to unit growth as the company expands its commercial fleet partnerships.
Other potential risks involve the legitimacy of related party revenue, rising ad expenses, lack of reported operating cash flow due to working capital pressures, and management selling.
This content was originally published on Investing.com
