Citi analysts on Tuesday started covering Carvana Co. and CarGurus Inc. stocks at the equivalent of a hold rating, saying the online car marketplaces stand to benefit from growing consumer desire for online shopping and gaining market share in a fragmented industry.
Ronald Josey at Citi also gave Carvana
CVNA,
a $5.50 price target, representing upside of about 12% over Tuesday prices.
Concerns have swirled about Carvana’s debt load and liquidity in recent sessions, with some on Wall Street fearing bankruptcy. The stock is down 98% this year, compared with losses of around 16% for the S&P 500
SPX,
“Carvana is the largest online used vehicle dealer offering nationwide coverage across its reconditioning and logistics network,” Josey said.
The company is on pace to sell more than 420,000 used vehicles this year, accounting for around 1% of the U.S. used-car retail market.
“In a more normalized market environment for new and used vehicles, we believe Carvana is well positioned to continue to generate share gains given the highly fragmented retail category for used cars that remains underpenetrated online,” the analyst said.
Carvana’s executives are likely to come to “a negotiated agreement” with creditors, although the situation bears watching for any impact on demand.
Carvana ramped up investments for growth, but the surge in demand for used cars led to rising prices that ended up affecting demand and hitting profit margins as well as financing.
Citi’s Josey also started coverage of CarGurus
CARG,
with a hold equivalent rating and a $14 price target, a 3% upside.
CarGurus is an online marketplace and auto platform for research and shopping for new and used cars. It also offers dealer services.
“CarGurus’ differentiated reach across its consumer and dealer networks and its end-to-end offerings are helping to bring the automotive industry online,” Josey said.
Citi is “constructive” on the stock, saying that the risk/reward ratio is “balanced at current levels.”
Shares of CarGurus have dropped 59% this year.