Carvana stock crashes nearly 40% as Morgan Stanley sets $0.10/share bear case (update)

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Carvana (NYSE:CVNA) stock cratered on Friday after a disappointing Q3 earnings release and outlook that raised bankruptcy worries.

While Morgan Stanley’s Adam Jonas has long been largely supportive of the Carvana (CVNA) business model, he pulled his rating on the stock altogether after the poor results and pessimistic forecast for the fourth quarter.

“Secured borrowing capacity may be available but we believe equity holders also face significant risk of dilution, driving a wide range of outcomes and prompting us to remove rating and target,” Jonas told clients on Friday.

Along with the removal of his previous Equal-Weight rating on the name, he slashed his price target ranges, with a $60 price target assigned in October being replaced with a base range of $1 to $40 and a bear case of just $0.10.

“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),” he concluded. “As such, we feel it is prudent to remove our rating and price target, establishing a 12-month base case range of $1 to $40 (bull case $70/share, bear case $0.10/share).”

According to Bloomberg data, the company’s 5.875% and 5.5% notes due in 2028 and 2027, respectively, both fell to all-time lows below $0.40 near mid-day. The former trended near $0.36 shortly before Friday’s close.

The 39.89% drop for Carvana shares on Friday was a record one day decline for the stock. It also extends the steep slide for the stock in the past year that has erased over 97% of the company’s market cap from its peak. The 52-week low for the stock at $8.37 touched on Friday is a far cry from the 52-week high of $307.11 reached in November 2021.

Read more on why SeekingAlpha’s Head of Quantitative Strategies Steven Cress says the company is in “zombie territory.”

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