Up 931% in One Year, Is Carvana Stock Overvalued?

The pre-owned car market has undergone notable shifts incited by multiple factors, such as inflation, interest rate hikes, pent-up demand, and tax refunds. According to Cox Automotive, the used-vehicle market, from all retail and private transactions, beat its forecast to end 2023 with about 35.9 million units, while retail closed out 2023 at 19 million units.

This year, total pre-owned vehicle sales and used retail sales are expected to improve over 2023 to hit 36.2 million and 19.2 million units, respectively, despite continued supply concerns. Specifically, the global used-car trading e-commerce market is expected to grow at a CAGR of 12.2% by 2031.

Online pre-owned vehicle retailer Carvana Company (CVNA) is poised to benefit from this anticipated growth, having capitalized on its disruptive business approach and enlarged its logistics network to cater more efficiently to a broader customer base.

Shares of Carvana rose significantly in the first four years after it went public in 2017. However, macroeconomic headwinds during 2022 took a heavy toll on the business, causing a massive plunge in the auto retail stock. Remarkably, Carvana managed to evade what looked like imminent bankruptcy in 2023, with its shares bouncing back by over 900% over the past year as a result. However, this massive rally has ignited worries concerning Carvana's valuation.

About Carvana Company Stock

Based in Tempe, Arizona, Carvana (CVNA) is an online retailer of pre-owned vehicles. Renowned as the most swiftly expanding online pre-owned car dealership in the U.S., Carvana's unique selling proposition lies in its iconic multi-story glass tower vending machines designed for cars. A testament to its exponential growth and success, Carvana was listed among the 2021 Fortune 500 list, becoming one of the youngest entrants to earn this recognition. Its market cap currently stands at $16.3 billion.

Shares of CVNA rose 931% over the past 52 weeks, significantly outperforming the S&P 500 Index’s ($SPX) 31% rise over this time frame.

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The stock is currently priced at 1.49 times sales, which compares to the industry average of 0.90x. In terms of price-to-cash flow, the stock’s valuation of 115.77x is substantially higher than its industry peers. Considering the company’s uncertain growth prospects, this valuation looks hugely stretched.

Improving Profitability Offsets Slowing Growth

Carvana capped 2023 with a quarterly loss of $114 million, or $1 per share. But its stock surged following its inaugural annual profits, reporting a full-year net income of $450 million, or $0.75 per share, surpassing the Wall Street projections. Its increasing profitability mitigated concerns over its 21% revenue decline in 2023.

Carvana’s adjusted EBITDA of $339 million (or $1.084 per unit) and a margin of 3.1% in 2023 signify its strategic emphasis on profitability. This approach includes cost reduction, streamlining the vehicle purchasing process, utilizing data analytics for pricing and risk assessment, and optimizing existing infrastructure. Carvana's vertical integration grants it control over the entire customer journey, from acquisition to financing, providing it with competitive advantages. Also, Carvana tackled its debt by exchanging unsecured debt for secured notes, reducing its total debt by over $1 billion.

Its decent Q1 2024 guidance further impressed investors. Assuming economic stability for the quarter, Carvana projects a slight increase in retail units sold annually and adjusted EBITDA significantly surpassing $100 million. Based on the current quarter results so far, Carvana expects consistent retail gross profit per unit (GPU), rising wholesale GPU, and reduced SG&A per retail unit without significant one-time impacts.

What Do Analysts Expect for Carvana Stock?

Carvana stock has a consensus “Hold” rating. Of the 20 analysts offering recommendations for the stock, two rate it a “Strong Buy,” 17 suggest a “Hold," and one advises a “Strong Sell.”

CVNA is currently trading at a premium to the average analyst price target of $58.73. The Street-high price target of $90, assigned by RBC Capital in March, indicates that the stock could rally as much as 14%.

Moreover, following Carvana's Q4 results and guidance for the current quarter, analysts at William Blair and Raymond James upgraded their ratings on the stock to “Outperform” and “Market Perform,” respectively. While Raymond James cited encouraging GPU trends, William Blair noted profit increases and unit growth, anticipating a breakout with the optimistic 2024 forecast.

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The Bottom Line on CVNA Stock

Carvana continues to perform well within the flourishing online used car retail market. The bullish momentum in its shares was fueled by the prospect of declining interest rates, the firm's bottom-line improvement last year, and the optimistic outlook for the current quarter.

While Carvana's shares currently trade above the mean price target, the surge appears "frothy." Given the stock’s overvaluation, investors are advised to exercise caution.

On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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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