Is the Market Overreacting to Carvana’s (CVNA) Subprime Exposure? Needham Thinks Otherwise.

Carvana Co. (NYSE:CVNA) is one of the best stocks to buy according to Citadel LLC. The company has recently been the subject of speculation about its financial health. In an October 22 interview on Bloomberg, well-known short seller Jim Chanos said the company raised “lots of red flags” after subprime auto lender and used-car retailer, Tricolor Holdings, filed for bankruptcy around September 10.

Chanos, who has been short or held a negative stance on Carvana for a long time, argues that it is hard to believe the company is not facing any heat despite defaults, bankruptcies, and rising delinquencies. The stock tanked 13% on the 22^nd.

However, Needham analyst Chris Pierce believes that the concerns over subprime auto loans have been blown out of proportion. On October 24, the analyst reaffirmed his Buy rating on Carvana Co. (NYSE:CVNA) with an unchanged price target of $500. He argues that the headwinds in Other Gross Profit per Unit (GPU) are transitory and his assumptions already factor in these uncertainties. For context, Other GPU is the per-vehicle profit the company generates from value-added products and services, primarily auto loan financing and vehicle service contracts.

Pierce notes that since market expectations for unit growth are already modest, the downside risk to estimates appears limited. According to him, this creates a more stable environment for Carvana Co. (NYSE:CVNA), as he believes long-term investors are likely to look past short-term volatility. The $500 price target indicates an over 50% upside from current levels and implies a relatively premium valuation. However, the analyst believes the strong growth profile justifies his valuation assumptions.

Separately, investors should note that Carvana carries a high volatility profile (beta: 3.6).

Carvana Co. (NYSE:CVNA) is an online used-car retailer that operates an e-commerce platform for buying and selling used cars. Apart from the primary services, it also offers financing, complementary products, and a logistics network.

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Disclosure: None. This article is originally published at Insider Monkey.