Wedbush Securities has maintained its 'outperform' rating on Carvana Co. (NYSE:CVNA), even after adjusting its 12-month price target downwards to $425 from $500. This decision comes in the wake of Carvana's fourth-quarter financial disclosure, which prompted a 9% decline in share value during after-hours trading. Despite some short-term challenges, Wedbush expresses continued confidence in the online automotive retailer's long-term growth prospects, particularly its capacity to enhance operating margins.
Carvana's fourth-quarter financial report revealed a substantial increase in revenue, reaching $5.6 billion, marking a 58% year-over-year rise and surpassing market expectations by approximately 7%. The volume of used vehicles sold also saw significant growth, with 163,522 units retailed, representing a 43.0% increase from the previous year and exceeding consensus forecasts by 4.2%. Furthermore, the average selling price for vehicles climbed by 13.9% year-over-year to $25,415.5. However, a key area of concern was the gross profit per unit, which registered at $6,562, falling short of the $6,823 consensus estimate and experiencing a 5.1% decline compared to the prior year. Adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) reached a record quarterly high of $511 million, translating to a 9.1% margin, though this figure was about $27 million below analyst projections. Wedbush attributed this margin compression primarily to elevated reconditioning costs, particularly at newer operational sites with less experienced management.
Looking ahead, Carvana's management anticipates sequential growth in both units sold and adjusted EBITDA for the first quarter of 2026, aligning broadly with current market consensus. Wedbush has subsequently revised its first-quarter revenue forecast to $5.9 billion, projecting a 38.7% year-over-year increase and about 6% higher than its previous estimate. The adjusted EBITDA for the same period is now projected at $657 million, with an 11.2% margin, a slight decrease of 30 basis points from earlier assumptions. For the entire fiscal year 2026, Wedbush has elevated its revenue projection to $26.9 billion, indicating a 32.5% growth rate. The firm also models adjusted EBITDA of $3.0 billion, maintaining an 11.2% margin, which is a slight adjustment from the previous 11.6%. The company's ambitious long-term objective remains to achieve three million annual retail units and a 13.5% adjusted EBITDA margin within the next five to ten years.
In 2025, Carvana successfully delivered 597,000 retail units, marking a 43.3% year-over-year increase and showcasing its continued market share gains within the highly competitive used car industry. Wedbush's valuation of Carvana employs a discounted cash flow (DCF) methodology, utilizing a 10.5% weighted average cost of capital and a 3.5% terminal growth rate to arrive at its $425 equity value per share. The DCF model assesses the current value of anticipated future cash flows, while the weighted average cost of capital represents the combined cost of debt and equity financing. Despite the immediate pressure on profit margins, Wedbush remains convinced that its long-term investment rationale, centered on operational leverage, consistent unit growth, and a strong competitive stance, remains valid. The firm views the market's reaction to the recent earnings report as an overcorrection.