Carvana's Convincing Tactics to Convince This Former Bear to Change His Tune on Stock

Acknowledging where credit is due, Carvana Co. appears to be reaping the rewards of recent "operational adjustments," according to Jefferies analyst John Colantuoni. In a Tuesday morning report, Colantuoni reversed his bearish stance on Carvana shares (CVNA, -1.17%). Previously concerned about potential challenges to Carvana's unit economics in the early part of this year, Colantuoni now believes that the company's efforts to reduce retail reconditioning and transportation costs have positioned the online car seller more favorably.

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Carvana's optimistic guidance for a fourth consecutive record high in retail gross profit per unit, delivered in the recent results, indicates to Colantuoni that the operational improvements have led to "sustainable improvements to unit economics."

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In light of this progress, Colantuoni has revised his projections for free cash flow and earnings before interest, taxes, depreciation, and amortization (EBITDA). Assuming retail gross profit per unit remains relatively constant, he increased his 2025 gross profit expectations by 15%, resulting in an 80% boost to his 2025 EBITDA expectations.

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Furthermore, Colantuoni now perceives a reduced risk of Carvana facing a cash crunch. He observes early indications that Carvana is transitioning into a self-financed enterprise, capable of utilizing cash from operations to support growth and manage outstanding debt. His model anticipates a "relatively stable" cash position for Carvana between 2026 and 2031, even as the company is projected to use cash on hand for "four substantial principal payments during that period."

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Carvana's progress in managing cash diminishes the likelihood of the company needing to raise equity, thereby avoiding dilution for current shareholders, Colantuoni added. Consequently, he elevated his rating on Carvana shares from underperform to hold. Despite this positive adjustment, he refrains from adopting a more optimistic stance at present due to the perceived risk that unit economics could face pressure once the company accelerates its growth.

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In tandem with the rating upgrade, Colantuoni increased his price target on Carvana shares to $85 from $30 in his latest note. He joins a substantial group of analysts who have taken a more cautious position. Among the 22 analysts tracked by FactSet covering Carvana shares, two hold buy-equivalent ratings, 16 have neutral-equivalent ratings, and four maintain sell-equivalent ratings.

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In Tuesday morning trading, Carvana shares rose over 2%, bringing their year-to-date rally to just above 50%. The market's positive response reflects the growing confidence in Carvana's operational adjustments and their potential impact on the company's financial performance in the coming years.

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