Morgan Stanley Analyst Adam Jonas has downgraded shares Carvana (NYSE:) To Equal Weight From Overweight With a $105.00 Per Share Price Target, Down from $360.00

The analyst urges Carvana to “take action to adjust its cost structure to remain a growing business.” Carvana must prioritize cost-cutting over growth, which makes a “challenging pivot for any growth company.”

Interestingly, Jonas’ move today comes just 2 months after he reiterated an Overweight rating on CVNA. Jonas stated that Carvana’s stock was trading at $140 per share back in January 2000.

“We pound the table on CVNA right now and see it as offering one of the strongest bull/bear skews of any stock under our coverage. We are able to see why this stock fell so far from its peak. In a volatile, if not unpredicted used car market, expectations and multiples were too high. Carvana has experienced extraordinary growth over the last 18 months due in part to the changes in consumer behaviour during the pandemic. Our view is that the market is not too optimistic about Carvana’s future growth, liquidity, and the reason for the ADESA acquisition. CVNA, in our opinion, is an auto retailer that offers the best value, has strong management and sufficient liquidity, as well as institutional support. The set-up reminds us of Tesla in 2019.”

The analyst still believes CVNA is “a good company,” however he also sees “serious challenges” facing the business.

“By the company’s own admission, it had accelerated growth at precisely the wrong time into a consumer slowdown leaving a major mismatch between capacity and demand, creating a liquidity crunch. Of course, it’s always better to raise outside capital when you don’t ‘need it.’ In recent weeks, CVNA found itself in the position of raising capital at a time when they really needed it, coinciding with a challenging high yield market environment,” Jonas said in today’s note.

Finally, Jonas urges Carvana to consider addressing 4 key areas: 1) SG&A (advertising, logistics and other overhead costs), 2) capex (moving from expansionary to maintenance), 3) working capital (which comes with slower growth) and 4) improved GPU (being more selective to improve metal margins and reducing strain on the operations).

Carvana stock prices are down 5.5% today, hitting a 2-year high.

By Senad Karaahmetovic