Carvana crashes as Apollo-Pimco creditor truce creates stock doubt

(Bloomberg) – Carvana Co. plummeted on Wednesday as Wall Street pessimism spilled over into its stock after the online auto dealer’s top creditors signed an agreement to cooperate in negotiations with the company.

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Shares plunged a record 45% and triggered at least one volatility halt after Wedbush analyst Seth Basham cut his 12-month forecast for the stock by 89% to $1 and downgraded it to underperform. The move comes a day after Bloomberg News reported that Carvana’s biggest creditors, including Apollo Global Management Inc. and Pacific Investment Management Co., signed a pact to avoid a debt fight that has plagued other debt restructurings in recent years .

“These developments point to a higher likelihood of a debt restructuring that could render equity worthless or, at best, severely dilutive in a bankruptcy scenario,” Basham wrote in a note to clients.

The company’s bonds have fallen below 50 cents on the dollar in recent weeks, an indication that traders believe there is a high probability that they will default. Carvana’s $3.3 billion bond due 2030 is trading at about 42 cents, down from 79 cents at the start of the year.

It’s the second time in about two months that Basham has lowered his rating on Carvana. Back in October, he downgraded the company to neutral and lowered its price target to $15 from the previously set $50. As recently as January, his 12-month price target for the stock was $300 per share.

Basham isn’t alone in his latest call for the stock. About a month ago, Morgan Stanley analyst Adam Jonas withdrew his rating on Carvana after it missed gains, saying it could be worth as little as $1. Analysts’ average 12-month price target for the company has fallen 95% this year and is now just over $17, compared to more than $361 at the start of January. Still, that’s about 350% higher than the current price.

Wednesday’s plunge is contributing to a painful turnaround for investors. The company’s shares soared more than 160% in 2020 as it benefited from a boom in demand for used cars in the early months of the pandemic. But as supply chains normalized, prices plummeted, as did Carvana’s margins. That, coupled with a slowing economy, tightening monetary policy, and an ongoing cash burn, quickly pissed investors off.

Shares of the Arizona-based company are down nearly 99% in the 16 months since it closed at a record high of $370.10. The drop wiped out a market value of around $60 billion, and Carvana is the second worst-performing US stock worth at least $500 million by this stretch.

For investors, the $1 price target is a stark reminder that despite the massive declines, more downside is still possible. Carvana shares would have to fall another 85% from Tuesday’s close to reach the $1 level.

(Updates the stock price movement.)

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