After delivering an astounding performance so far this year, online used-car retailer Carvana (NYSE:CVNA) is finally showing some signs of distress. Even worse, the recent wave of red ink has caught the attention of an Exane BNP Paribas analyst who views the enterprise skeptically. In addition, options traders have largely placed pessimistic wagers, contributing to the volatility in CVNA stock.
According to Best Stocks, analyst Chris Bottiglieri recently downgraded CVNA stock to “neutral” from “outperform,” implying that the company may not surpass market expectations in the near term. That’s not an unreasonable assessment, either. On Sept. 14, CVNA stock closed at $55.86, very close to its 52-week high of $57.19. Yesterday, however, shares closed at $37.86 per share, reflecting a loss of over 32%.
Following the downgrade, CVNA stock initially fell 10% before adding more red ink in the early afternoon session. Worryingly for long-side speculators, the pain might get worse from here on out.
To be fair, given the magnitude of short interest against Carvana, the fear of a short squeeze catching the bears off guard presents a massive risk. Nevertheless, the bullish thesis runs against the realities of the used-car market. Per UBS, “global car production will exceed sales by 6% this year,” leaving an excess of 5 million vehicles.
Options Traders Put CVNA Stock in Their Crosshairs
Fundamentally, CVNA stock may just be running into a math problem. Given the projected vehicle excess, retailers will need to cut prices to move cars off dealers’ lots. Even more worrying, Yahoo Finance reports that automakers are preparing for a price war. Unfortunately, that backdrop will almost certainly not be helpful for Carvana, especially without its pandemic catalyst of offering limited-contact transactions.
Additionally, even with a glut of supply possibly entering the market, that might not help push sales. With inflation running stubbornly high and borrowing costs through the roof, consumers are holding onto their vehicles for longer. Per S&P Global Mobility, the average age of passenger vehicles in the U.S. stands at a record 12.5 years. Again, that’s not a helpful narrative for CVNA stock.
That also means options traders smell blood in the water. According to Fintel’s options flow screener — which screens for big block trades likely made by institutions — the biggest transactions (based on the premiums paid or received) involve pessimistically leaning trades.
Why It Matters
According to TipRanks, analysts peg CVNA stock as a consensus hold. This assessment breaks down as one buy, 12 holds and four sells. Overall, the average price target for Carvana lands at $41.06 per share, reflecting about 24% upside potential.
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.
