Carvana's 'bloated' costs stand in the way of its goals, analyst says in downgrade

Carvana Co. shares have lost more than 90% of their value this year, but one analyst isn't betting on a rally from here. Wedbush analyst Seth Basham downgraded Carvana's stock to neutral from outperform Tuesday, writing that "a further deterioration in market conditions, a bloated cost structure, and high cash burn" make it difficult for the company to achieve its potential. Basham called Carvana's recent purchase of Adesa's U.S. physical auction business "an albatross around its neck" as it increases how much interest expense Carvana has due each year and also sticks the company with "additional reconditioning capacity that it does not need." In Basham's view, Carvana's "cost base remains well above levels needed to reach its near-term stretch goal of $4,000 in SG&A (ex D&A [depreciation and amortization] and stock-based compensation) per unit," based on current sales trends. Additionally, he thinks the company "will likely have to make more drastic cost cuts." Despite the downgrade, Carvana shares are ahead 1.4% in Tuesday afternoon trading.

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