Carvana or ACV Auctions? J.P. Morgan Weighs In

The digital transformation has extended to most parts of everyday life and that includes the used-car industry. It’s a segment ripe for disruption and car sellers have cottoned onto the opportunity in changing the way vehicles are bought and sold. Offering cutting-edge digital tools, the advantages of online car trading for customers are manifold and include total end-to-end purchasing abilities, data analysis and photos – all backed with helpful search tools and different delivery options.

However, apart from dealing with increasing competition, these disruptors have been faced with big challenges in recent times, hampered by a tough macro environment amidst a backdrop of soaring inflation and consumers’ dwindling purchasing power.

As with any industry, there will be winners and losers. Naturally, there are public companies operating in the segment and J.P. Morgan analyst Rajat Gupta has been tracking the progress of several names. We’ve decided to get the lowdown on a couple and see which one the banking giant prefers. Let’s take a closer look.

ACV Auctions (ACVA)

Despite the rise of e-commerce and its prevalence in our lives, the digital online auto wholesale market is still relatively young. ACV Auctions’ goal is to create a sea change in the wholesale automotive industry. The company offers a digital marketplace for wholesale vehicle deals, bringing together used car buyers and sellers. Additionally, ACV provides data services whereby customers are given detailed and transparent information regarding the vehicles.

Along with its market, ACVA sets itself apart by employing Vehicle Condition Inspectors to conduct inspections at dealer sites, enhancing the accuracy of the vehicle data made available on the platform.

The company’s most recent quarterly report was a good one. In 3Q22, revenue rose by 14.4% year-over-year to $105 million, meeting Street expectations. EPS of -$0.15 came in better than the -$0.18 anticipated by the analysts. The company guided for revenue between $97 and $100 million, below consensus at $105.17 million.

Despite a soft outlook, the market reacted positively to the report, but that was not enough to stave off the bears in 2022, with the shares seeing out the year 56% into the red. The stock, however, has performed well so far this year – up by 35%.

In his recent note on this stock, J.P. Morgan’s Rajat Gupta notes the headwinds facing the industry, although he sees ACV as well-prepared to deal with them.

“Despite the supply side improving on new vehicles, the retail demand outlook remains bleak, suggesting 2023 is unlikely to be a volume recovery year for the industry. That said, the sector is still cyclically better positioned than other ecosystem players, and we expect ACV to see continued market/wallet share gains, coupled with SG&A leverage and little liquidity/cash burn risk. We also expect management to reiterate expectations for breakeven EBITDA run-rate target exiting 2023 irrespective of macro scenarios, demonstrating flexibility in the business model,” Gupta opined.

As such, Gupta stays with bulls, rating ACVA shares as Overweight (i.e., Buy. (To watch Gupta’s track record, click here)

Overall, this name gets the Street’s full support; all 6 recent analyst reviews are positive making the consensus view here a Strong Buy. (See ACVA stock forecast on TipRanks)

Carvana Co. (CVNA)

Next under the JPM microscope is Carvana, a company that has been in the news a lot recently. Famous for its car “vending machines,” Carvana is also a company that has set out to change the way used cars are bought and sold. The company offers an online marketplace that provides an intuitive car buying and financing platform, enabling customers to avoid the standard dealership framework. Consumers can buy over 55,000 vehicles and arrange next-day delivery or pickup at one of the aforementioned vending machines.

Despite the eye-catching gimmick and history of strong growth, Carvana has run into some big issues over the past year as was reflected in the latest quarterly report – for 3Q22.

Revenue declined by 2.6% year-over-year to $3.39 billion, falling $300 million short of consensus expectations while the company posted a loss of $2.67 per share, badly missing the -$2.17 analysts were expecting. Total retail units sold in the quarter dropped by 8% to 102,570.

Saddled with debt, and badly impacted by soaring inflation and falling vehicle sales, the company appeared to be on the brink of bankruptcy toward the end of last year. In the meantime, Carvana has taken measures to steady the ship but the result of all the upheaval was a stock that shed 98% of its value in 2022. That said, boosted by likely short covering, and exhibiting meme-stock-like behavior, the shares have tripled year-to-date.

Carvana will report Q4 financials later this month. Ahead of the print, JPM’s Gupta lays out what’s on the menu.

“For 4Q,” the analyst said, “we expect another tough volume quarter (down -24% y/y) given the weak industry backdrop and as CVNA focuses on reducing complexity and prioritizes profitable sales to protect cash burn. We expect to see some operational progress related to SG&A reduction (including from fixed cost reduction and announced headcount cuts), logistics optimization (including benefits from shipping fees) and reconditioning, that should partially offset price and volume pressures.”

Believing the shares remain “expensive on an EV basis,” Gupta rates CVNA a Neutral, while his $5 price target implies the shares will give back to market 65% of the recent gains.

Like Gupta, most of his colleagues are sitting this one out; based on 16 Holds, 1 Buy and 2 Sells, the analyst consensus rates the stock a Hold. The shares are expected to change hands for a 37% discount a year from now, considering the average target stands at $8.96. (See Carvana stock forecast)

Conclusion

It’s an easy one. If you’re looking to invest in the online used car segment, both J.P. Morgan and the rest of the Street strongly recommend investors plump for ACV Auctions right now.

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.