Used car e-retailer Carvana CVNA has been one of the most fascinating comeback stories in recent years. From being on the brink of bankruptcy in 2022 amid high debt and operational inefficiencies, Carvana has made heads turn with its epic turnaround. From trading below $5 at the end of 2022, the stock has shot up around 38 times since then. Shares of CVNA closed at $191.92 yesterday. Over the past year, shares of CVNA have rocketed more than 500%, breezing past the broader market and its close peers, including CarMax KMX, AutoNation AN and Sonic Automotive SAH.
1-Year Price Performance
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Given this meteoric price rise, Carvana seems overvalued going by its P/S ratio. It's trading at a forward 12-month sales multiple of 2.6, higher than the industry and its own 5-year average. Now, a premium valuation often signifies a strong confidence in the stock’s prospects. Let’s assess the company’s fundamentals to see if it actually commands this premium valuation or have investors priced in too much optimism about its future growth?
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Behind CVNA’s Bull Run
Carvana’s financial and operational metrics have been improving, driving the stock price momentum. One of the standout metrics is Carvana’s gross profit per unit (GPU), which has grown exponentially. Back in 2014, the company’s adjusted GPU was a modest $388. Fast forward to the last reported quarter, and this figure has surged to over $7,300.
Image Source: Carvana
Several factors have contributed to this dramatic improvement. The company has managed to reduce retail reconditioning and inbound transport cost reductions as a result of fundamental improvements, including in-sourcing third-party services, staffing normalization, process standardization, proprietary software development, logistics network utilization and reduced inbound transport distance. In addition to lower reconditioning and transportation costs, expanded customer sourcing and additional revenue streams from value-added services are also driving retail gross profit per unit gains.
CVNA has been focusing on enhancing operational efficiency across the business, with several technology, process, and product initiatives underway. It has successfully reduced its SG&A expenses by right-sizing staffing, advertising and inventory. The efforts have been paying off, with the company achieving record profit margins in the second quarter of 2024.
Image Source: Carvana
Carvana’s management has executed a well-thought-out pivot from pure growth to operational efficiency. The company’s three-step plan — first, focusing on driving positive adjusted EBITDA; second, achieving significant EBITDA per unit; and third, returning to growth with a more efficient operating model — has been pivotal in its turnaround.
This shift in focus has allowed Carvana to turn the corner financially. The company’s ability to deliver on its promises has restored investor confidence and led to the meteoric rise in its stock price.
Will Carvana’s Hot Streak Continue?
Despite its impressive growth, Carvana still holds only a 1% share of the highly fragmented U.S. automotive retail market. This suggests that there is ample room for the company to expand, especially as more consumers gravitate toward online car buying. Carvana’s unique platform, which allows customers to browse vehicles, inspect them using 360-degree imaging technology, secure financing and arrange delivery, positions it as a leader in the digital transformation of car sales.
In the second quarter of 2024, Carvana sold over 100,000 cars, making it the second-largest used car retailer in the United States. This is a significant achievement and highlights the company’s growth potential in a market that is still dominated by offline sales. With consumers increasingly favoring convenience and transparency, Carvana’s innovative approach gives it an early-mover advantage in the e-commerce space for used cars.
Additionally, macroeconomic factors could work in Carvana’s favor. While high interest rates have been a challenge for the auto industry, Carvana has shown resilience by increasing its retail unit sales by 33% in the last reported quarter. With the Federal Reserve recently cutting rates for the first time in four years and further rate cuts on the horizon, the demand for used cars could see a boost, providing Carvana with an opportunity to accelerate its growth.
The Zacks Consensus Estimate for CVNA’s 2025 sales and EPS implies a year-over-year improvement of 20% and 231%, respectively. Its EPS estimates for the second and third quarters of 2024 and full-year 2024 and 2025 have moved north in the past 60 days.
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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.
CVNA’s Headwinds: Debt and Delinquencies
Carvana’s success story is not without its challenges. One of the concerns is the company’s high debt load. While a debt restructuring deal in September 2023 provided the company with much-needed breathing room, Carvana still carries a significant amount of debt. Fortunately, none of its long-term debt is due until 2028, giving the company time to continue its turnaround efforts.
Another potential issue is Carvana’s reliance on selling finance receivables to Ally Financial. Ally recently warned of increased credit challenges, citing rising delinquencies in auto loans. If these credit issues worsen, it could risk Carvana’s ability to generate high-margin gains from its finance receivables. While this is not an immediate concern, it is a risk that investors should keep in mind.
Final Thoughts
Carvana’s remarkable turnaround and growth trajectory have certainly captured the attention of investors, leading to its premium valuation. The company’s focus on operational efficiency, coupled with its innovative platform and market potential, supports the idea that its high valuation may be justified. Given its differentiated business model, Carvana is well-positioned to capitalize on the shift to online car buying.
However, the risks cannot be ignored. High debt and potential credit challenges could pose threats to the company. That said, with no major debt repayments looming in the near term and the potential for interest rate cuts to boost demand, Carvana’s premium valuation appears sustainable — at least for now. As long as the company continues to execute its strategy and improve its fundamentals, its stock can maintain its upward momentum.
Carvana currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
