Online car-shopping website Carvana (NYSE: CVNA) had a good day Wednesday, although it might have been an even better day. Early trading saw Carvana stock spike more than 10% higher on a positive mention of the stock by Wolfe Research.
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Later in the day, about half these gains evaporated — but still left Carvana stock up a healthy 5.4% by close of trading. The question is "why?"
The answer is that Wolfe Research report I just mentioned. StreetInsider.com has the details. As it explains, Wolfe reiterated its outperform rating and $65 price target on Carvana stock, which closed today's trading just a few cents shy of $56 a share.
Wolfe says it's been waiting a while to see a "massive catalyst" to unlock value in Carvana stock — namely, a "path" to improving profits at the company's auto financing business.
"CVNA is significantly under-earning in its credit business," notes Wolfe, a point that's hard to argue, seeing that Carvana hasn't earned a profit in the last five years. But Carvana has now filed an "ABS-15G" report on a batch of asset-backed securities known as "Carvana Auto Receivables Trust 2019-1" — a move that seems tied to a due-diligence investigation by someone who wants to buy these loans.
Such a sale, argues Wolfe, could lower Carvana's "cost of funds" and improve its "Financing Income." It could even "include some of Carvana's deep subprime loans [and] completely remove a significant overhang on the stock from investor concerns around self-dealing in its credit biz," says the analyst.
Whether any or all of this will be enough to turn Carvana into a profitable company remains to be seen. As for today, though, it's already been enough to give Carvana stock a lift.
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