Carvana Stock: An Intriguing Test of Market Trends

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Since broad markets bottomed in March, investors have been buying growth stocks like Carvana (NYSE:CVNA) hand over fist. E-commerce names have been particular winners. Carvana stock itself has risen 600%, and it’s far from alone.

Source: Jonathan Weiss /

In fact, that rally isn’t even the best in the sector. (NASDAQ:OSTK) has been the biggest winner, with a staggering 2,888% rally off its low. (NASDAQ:PRTS) and Wayfair (NYSE:W) have gained over 1,000%.

In that context, (NASDAQ:AMZN) almost looks like a loser. AMZN has gained “only” 95% from its March bottom. But that rally incredibly has added more than $700 billion to the company’s market value in less than five months.

It’s an understatement to say that e-commerce is hot. And with Carvana earnings arriving on Wednesday afternoon, to some investors that might suggest caution.

After all, following a 600% rally, Carvana earnings run the risk of being a classic “sell the news” event. At the least, it would seem like expectations for the report would be sky-high — and perhaps too high.

That’s not how it’s played out in the rest of the sector, however. In fact, recent history suggests a bullish posture toward Carvana earnings — while acknowledging that the report creates another intriguing test for e-commerce stocks, and growth stocks more broadly.

Nobody is Selling the News

The broad trend in the stock market the last few years has been that winners keep winning. That trend seems exaggerated in the context of recent earnings.

Amazon and Overstock both roared into earnings — and rallied further after the releases. OSTK gained 25% after its report last week, and Amazon added another ~$60 billion in market value.

It’s not just e-commerce, either. Advanced Micro Devices (NASDAQ:AMD) soared before earnings thanks to a stumble by rival Intel (NASDAQ:INTC) — and then jumped another 12.5% on a blowout quarter. Despite a pandemic that shut down bars and restaurants across the country, Boston Beer (NYSE:SAM) stock was up 74% in 2020 — and gained 25% more after its release. Pinterest (NYSE:PINS) had doubled before earnings, and tacked on another 36% on Friday.

These are just a few examples that show the broader trend. The market has not seen positive earnings reports, at least in the short term, as “priced in”. Nor have we, as far as I can tell, seen a report from a major company that looked like a blowout only to be met with selling. (Tesla (NASDAQ:TSLA) might come closest, and it’s possible I’m missing one or two others.)

Again, this earnings season has been a compressed version of broader trends in the market the last few years. Winners keep winning. And that’s largely because, so far, growth has trumped valuation.

What This Means for Carvana Stock

If those trends hold next week, it seems highly likely to be good news for Carvana stock.

After all, CVNA fits perfectly into those trends. It’s a classic growth stock: revenue more than doubled in 2019. The rally of late suggests investors see another big quarter on the way this week. And it’s a truly intriguing business that aims to bring e-commerce to automotive sales, an industry that has been notoriously resistant to any kind of change.

And the risks to Carvana stock are the kind of risks that haven’t played out elsewhere in the market. The stock is expensive on a revenue basis, and not profitable (or close). We’ve seen in the rest of the market that investors simply aren’t focused on those near-term metrics.

Again, the stock has gained 600% from the lows. But OSTK, to name one example, had seen an even more intense rally into earnings — and soared regardless.

To be sure, Carvana still has to deliver the kind of report bulls are expecting. But here, too, history suggests optimism. At least in terms of revenue (which presumably is what counts at this point), Carvana generally has topped estimates. That includes four straight beats with 2019 numbers.

As the disclaimer goes, past performance does not guarantee future results. But the trends clearly suggest optimism toward Carvana stock ahead of earnings this week.

A Market Test

Of course, there’s a very real question as to for how long these trends can hold. At some point, presumably, valuation has to matter. Carvana stock, for instance, trades at almost 50x trailing twelve-month gross profit.

And, presumably, at some point the broader rally in tech has to end. The NASDAQ Composite, despite a pandemic that still has the potential to affect the global economy, has rallied almost 20% so far this year. Carvana stock despite possible pressure on automotive sales, has gained 68%.

Those worries have existed for some time, however, relative to both CVNA and the market as a whole. So far, the risks haven’t materialized. It’s possible earnings from Carvana and Wayfair this week are a sign that sentiment is starting to change. Until that sign arrives, however, investors are probably going to bet on these trends continuing.

Vince Martin has covered the financial industry for close to a decade for and other outlets. He has no positions in any securities mentioned.

The post Carvana Stock: An Intriguing Test of Market Trends appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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