On Tuesday, Carvana Co. (NYSE:) received an upgrade from Jefferies to a Hold rating, a shift from its previous Underperform status. The firm also increased its price target on the company’s shares to $85, a significant jump from the earlier $30 per share forecast.
The upgrade is attributed to Carvana’s recent expansion in Retail Gross Profit per Unit (GPU), which indicates that the company’s operational adjustments may have led to sustainable improvements in unit economics. This progress, along with strides toward positive cash flow, has mitigated downside risk and created a more attractive risk-reward profile, prompting analysts to adjust their estimates closer to consensus.
Carvana’s guidance for the first quarter Retail GPU reaching a fourth consecutive all-time high has countered prior concerns of economic deterioration. The company’s efforts in reducing retail reconditioning and transport costs through customer sourcing, process standardization, and logistics efficiencies have been highlighted as key factors in this success. These cost reductions have coincided with improved inventory turnover and increased revenues from shipping fees.
Analysts have revised their assumptions, now considering the recent improvements in unit economics to be sustainable, even as Carvana scales up in the future. This has led to a 15% increase in the firm’s gross profit estimate for 2025, despite a slight reduction in the estimate for retail units. Consequently, the firm’s 2025 EBITDA estimate has surged by 80%, aligning it with the consensus.
The transition of Carvana towards a self-financed enterprise has also played a role in the rating upgrade. The company is expected to use cash from operations to fund growth and service outstanding debt, with cash levels projected to remain stable between 2026 and 2031. This shift reduces the risk of another dilutive equity offering, which in turn has increased the bear case price target to $20 from $5, enhancing the overall risk-reward proposition.
The new price target of $85 reflects an implied 34x multiple of the company’s 2025 enterprise value to EBITDA, which is near the highest multiple in the Internet sector. This valuation gives Carvana credit for the leverage embedded in its business model, which could potentially drive further upside to estimates if unit growth accelerates faster than anticipated. The target also implies a 27x price-to-earnings ratio for 2030, discounted at a 13.0% cost of equity, representing a 35% premium compared to the 10-year average of CarMax (NYSE:), acknowledging Carvana’s faster growth trajectory.
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