Carvana: Bank trims target to $425 but keeps ‘outperform’ on long term margin case

Wedbush Securities maintained its ‘outperform’ rating on Carvana Co. (NYSE:CVNA) but cut its 12-month price target to $425 from $500 following below-par fourth quarter results, which prompted a 9% fall in the shares after hours.

Fourth-quarter revenue of $5.6 billion from the car retailer rose 58% year on year and came in around 7% ahead of consensus expectations.

Retail used units totalled 163,522, up 43.0% year on year and 4.2% ahead of consensus, while average selling prices increased 13.9% year on year to $25,415.5.

However, gross profit per unit of $6,562 fell short of the $6,823 consensus estimate and declined 5.1% year on year.

Adjusted earnings before interest, tax, depreciation and amortisation of $511 million represented a 9.1% margin and marked the highest quarterly figure reported to date, but missed consensus by around $27 million.

Wedbush attributed the margin compression primarily to increased reconditioning expenses, particularly at locations with the lowest management tenure.

Management indicated that gross profit per unit should normalise over coming quarters, and Wedbush noted that reconditioning costs per unit would have been $220 lower in the fourth quarter if all locations had operated in line with the top quartile.

For the first quarter of 2026, the company guided to sequential growth in both units sold and adjusted earnings before interest, tax, depreciation and amortisation, broadly in line with consensus.

Wedbush now forecast first quarter revenue of $5.9 billion, up 38.7% year on year and around 6% above its prior estimate, with adjusted earnings before interest, tax, depreciation and amortisation of $657 million and an 11.2% margin, around 30 basis points below its earlier assumption.

For the full year 2026, Wedbush raised its revenue forecast to $26.9 billion, implying 32.5% growth, and modelled adjusted earnings before interest, tax, depreciation and amortisation of $3.0 billion at an 11.2% margin, down from 11.6% previously.

The long-term plan remained to reach three million annual retail units and a 13.5% adjusted earnings before interest, tax, depreciation and amortisation margin within five to 10 years.

In 2025, the company delivered 597,000 retail units, up 43.3% year on year, demonstrating continued share gains in the used car market.

Wedbush valued Carvana using a discounted cash flow methodology, applying a 10.5% weighted average cost of capital and a 3.5% terminal growth rate to derive its $425 equity value per share.

A discounted cash flow model estimates the present value of forecast future cash flows, while the weighted average cost of capital reflects the blended cost of debt and equity funding.

Although near-term margins were under pressure, Wedbush said its longer-term thesis on operating leverage, unit growth and competitive positioning remained intact and described the share price reaction as overdone.