Should You Buy, Sell or Hold CarLotz Stock After Q2 Earnings? Analyst Weighs In

Used car consignee business CarLotz (LOTZ) reported its fiscal Q2 2021 earnings one week ago. Investors weren’t impressed with the results, selling off CarLotz stock to the tune of 14% on the day after earnings came out. Wall Street doesn’t seem particularly impressed, either — but at least one analyst sees potential in CarLotz.

Last week, William Blair’s Sharon Zackfia downgraded CarLotz after its Q2 report. On Monday, however, a second analyst — Deutsche Bank’s Emmanuel Rosner — initiated coverage of CarLotz with a lukewarm “hold” rating, but a red hot $7 price target that implies the $3.85 stock has the potential to deliver 80% gains to new investors. (To watch Rosner’s track record, click here)

How likely is that?

In its earnings report last week, CarLotz boasted a 46% year-over-year increase in unit sales, with revenue growth of twice that — up 92%, and positive gross profits, too (a gross profit margin of 8.2%, reversing two straight quarters of contracting gross margins). Nevertheless, CarLotz lost money in Q2 on both an operating and a net basis, as it has done since the company’s inception. Indeed, its net loss of $0.06 per share was significantly worse than the breakeven results reported in the year-ago period. And as if to emphasize the point that even in a market where used cars are selling like fresh hotcakes, CarLotz is having trouble figuring out how to earn a profit. The company withdrew its previous financial guidance for this year — essentially telling investors that CarLotz has no idea when it will be profitable.

Deutsche Bank’s Rosner seems to sympathize with the situation CarLotz finds itself in, noting that “the company’s ability to efficiently source vehicles for consignment is facing considerable headwinds, as an unprecedented rise in used vehicle prices is prompting fleet customers to favor selling through wholesale channels.” As a result, CarLotz is having trouble getting hold of vehicles to sell.

Rosner hopes that this situation will “normalize” eventually, but warns that this “could be a long process,” and that it is difficult to forecast precisely when CarLotz will be able to “generate attractive unit economics” from its consignment business again. Until things do change, warns Rosner, the stock’s valuation “could remain capped near current levels.”

But if that’s the case, then … why tell investors that CarLotz stock will rise to $7 within a year?

Call it wishful thinking, but Rosner may simply be enamored of CarLotz’s business model, and hoping it will get a chance to prove itself. By taking cars off of fleet owners’ hands, sprucing them up, and selling them directly to retail buyers — cutting out all sorts of wholesale and retail middlemen in the process — CarLotz should, in theory, be able to both provide car sellers about $1,000 in extra sales price, and save car buyers $1,000 off their purchase price, and take a tidy fee for itself, while tying up “minimal capital” of its own.

That’s an extremely attractive proposition for both car sellers and car buyers, and as Rosner points out, it’s a business model that CarLotz has largely to itself right now. And the only thing that’s preventing it from working currently is .. a years-long global semiconductor shortage that’s making it supremely difficult for CarLotz to operate at all.

Looking at the consensus breakdown, 1 Buy and 2 Holds have been published in the last three months. As a result, LOTZ gets a Moderate Buy consensus rating. Given the $9.50 average price target, shares could rise ~145% in the next year. (See LOTZ stock analysis on TipRanks)

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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.