Struggling amid the onset of skyrocketing inflation and the subsequently hawkish response of the Federal Reserve, online auto retailer Carvana (NYSE:CVNA) just received a critical support line. S&P Global Ratings, a credit rating agency under the S&P Global umbrella, just upgraded and revised its securitization loss assumptions for Carvana’s lending business. As a result, CVNA stock is skyrocketing. Shares are gaining more than 25% in late afternoon trading.
According to a press release, S&P Global Ratings “raised its ratings on 21 classes from seven Carvana-sponsored securitizations backed by prime auto loans” and “affirmed its ratings on 19 classes from the same transactions.” It also lowered its loss assumptions on the same seven transactions. In addition, the credit agency “raised its ratings on 15 classes from five Carvana-sponsored securitizations backed by non-prime auto loans” and “affirmed its ratings on nine classes from the same transactions.” Finally, it “lowered or affirmed its loss assumptions on the same five transactions.”
Meg Kehan, Senior Director of Capital Markets at Carvana, said the following about the news:
“We believe the ratings actions taken by S&P demonstrate our ability to originate high quality assets in our lending business as a result of disciplined underwriting practices that are complemented by our third party servicer’s experience and expertise.”
Since 2019, Carvana has issued 21 auto loan securitizations, per the press release. Additionally, the company has issued three securitizations so far this year.
CVNA Stock Pops on Lower Bankruptcy Risk, But Concerns Linger
According to ScienceDirect, “securitization of auto loans is actually the securitization of retail installment sales contracts that are backed by autos and light trucks.” ScienceDirect also points out that securitization represented a major component of U.S. capital markets prior to the 2008 financial crisis. Indeed, it also played a “central role” in the crisis, which helps to tangentially explain enthusiasm for CVNA stock.
As Carvana’s management team readily admits, its lending arm is a major contributor to the overall business. Therefore, should a deluge of auto loan defaults emerge, this dynamic could impose substantial challenges to CVNA stock. However, the S&P Global Ratings announcement implies that the underlying consumer economy may be healthier than advertised.
Nevertheless, investors shouldn’t fall asleep at the wheel when it comes to CVNA stock. True, shares have stormed to an incredible return of more than 245% year-to-date (YTD). However, at the same time, CVNA is down almost 40% in the trailing one-year period.
Further, while consumers might not be defaulting on their loans en masse, car dealerships are still suffering from post-pandemic headwinds. Back in April, Fortune pointed out that soaring interest rates are a major issue holding many dealership businesses back.
Given that Carvana also has to price in its home-delivery service (either through charging the customer directly or indirectly via product premiums), CVNA stock may be more exposed to industry-wide pressure points.
Analysts Are Pensive
Even with the credit upgrade, analysts largely remain unconvinced about Carvana. They peg CVNA stock as a consensus “hold.” This assessment breaks down as two “buy” ratings, 13 “hold” ratings and one “sell.” Overall, the average price target for CVNA sits at $11 per share, implying around 31% downside risk.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.