By Sam Boughedda
Morgan Stanley removed its rating and price target for Carvana Co (NYSE:CVNA) in a note Friday, telling investors funding outcomes are uncertain.
Carvana shares have plunged over 36% so far in Friday's session.
Analysts at Morgan Stanley stated that Carvana's third quarter featured "falling sales, higher SG&A/unit, and a material exhaustion of cash." They added that secured borrowing capacity may be available, but believe equity holders also face a significant risk of dilution, driving a wide range of outcomes, prompting them to remove their rating and target.
"While the company is continuing to pursue cost-cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment (bonds trading at 20% yield) add material risk to the outlook, contributing to a wide range of outcomes (positive and negative)," wrote the analysts.
The analysts said they remain believers in the potential for CVNA to revolutionize the dealer business model and believe it has the best digitally-enabled proverbial "mouse trap" in the business.
"However, a sharp decline in used car market fundamentals combined with growing debt (net debt >$6.5bn vs. trailing 12mth EBITDA of negative $859mm) make the equity outcomes potentially far more dependent on the timing, structure and inputs of subsequent capital raising efforts than on the industry and company specific/operational inputs that drive our model," they explained.