Carvana Co (NYSE:CVNA) shares are trading higher Tuesday following an upgrade from Morgan Stanley.

What Happened: Morgan Stanley analyst Adam Jonas upgraded Carvana from Equal-Weight to Overweight and raised his price target from $260 to $280 following a sharp pullback in shares.

Morgan Stanley had been sitting on the sidelines due to Carvana’s high level of leverage on its balance sheet, but Jonas noted that the company’s leverage ratio is now in line with peers after the company boosted free cash flow generation, allowing it to support self-financing while paying down debt.

The Morgan Stanley analyst highlighted recent strong points out of earnings including upside surprises to EBITDA margin and retail unit growth.

“Carvana’s performance is particularly impressive when compared to its auto retailing peers who have struggled to grow used volumes this year,” Jonas said.

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Carvana sold 114,379 vehicles in the fourth quarter, up 50% year-over-year as revenue jumped 46%. The company noted that it became the most profitable public automotive retailer in U.S. history as measured by adjusted EBITDA margin last quarter.

Jonas pointed to Carvana’s 1% share of the U.S. used car market and noted that the company is just now approaching its prior peak retail unit volumes from 2021 and 2022.

“The difference this time around is the company’s ability to generate efficiencies at gross margin and SG&A/gross as CVNA has fulfillment infrastructure capacity (installed) more than double its current run rate,” the analyst said.

Finally, Jonas said he visited Carvana’s Inspection and Reconditioning Center earlier this month, which reinforced his view of the company’s competitive advantages. The Morgan Stanley analyst called Carvana a “potential Amazon of auto retail.”

Morgan Stanley has a bull case price target of $400 on Carvana shares, and a bear case price target of $120.

Carvana stock was trading above the $290 level in February before pulling back on broader economic concerns related to tariffs as momentum names got hit the hardest. Despite the pullback, Carvana shares are still up more than 140% over the past year, per Benzinga Pro.

CVNA Price Action: Carvana shares were up 2.90% at $219.82 at the time of publication Tuesday, according to Benzinga Pro.

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