Shares of used car retailer Carvana (CVNA) have been on an absolute tear this year. CVNA stock is up 650% in 2023, valuing the company at a market cap of $6.4 billion. Despite its monstrous gains, Carvana stock is still trading 90% below all-time highs.
Shares of Carvana listed on the NYSE in April 2017 at $11.10. A pandemic-fueled run drove share prices to over $350 in August 2021 before cooling off considerably. During the bear market last year, the stock fell to $4, wiping out significant investor wealth.
Let’s see if Carvana stock can continue to surge higher or if it will trail the broader markets in the future.
A Look at Carvana’s Financials
Carvana increased its sales from $3.9 billion in 2019 to $13.6 billion in 2022. As a used car online retailer, Carvana’s profit margins are quite low. For instance, it ended 2022 with a gross margin of just 9.1%, down from 15% in 2021. Its operating losses also widened to $1.49 billion from $104,000 in this period.
After enjoying solid top-line growth in recent years, Carvana reported sales of $2.61 billion, a decline of 25% year over year. But it was marginally higher than estimates of $2.6 billion.
Carvana explained the company reduced its inventory to lower costs leading to the revenue decline. However, it could still report a gross profit in the March quarter. In fact, gross profit per unit or GPU was up 52% year over year at $4,303 while its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss narrowed to $24 million from a year-ago loss of $348 million. Further, Carvana’s free cash outflow in Q1 fell to $98 million from $813 million in the year-ago quarter.
But if we dive further into the company’s losses, we can see its interest expense totaled $159 million, and depreciation expenses were $83 million. So, its net losses were $286 million, or about 11% of sales in Q1.
The Bull Case for Carvana Stock
Carvana aims to disrupt the used car market in the U.S. It has successfully built a platform that caters to most U.S. markets allowing customers to easily buy and sell cars online. The company has gained traction due to a wide portfolio of vehicles with a focus on competitive pricing. As the process is online, customers will benefit from transparent pricing, a wide range of selections, and a much easier buyer or seller process.
In 2022, Carvana sold 412,000 units which is just a fraction of the 40 million used cars sold each year in the U.S. We can see that Carvana has massive room to gain market share from legacy used car retailers in the upcoming decade.
Further, Carvana expects to report an adjusted EBITDA of $50 million while its GPU per unit is on track to grow by 63% to more than $6,000 in Q2. Analysts expect Carvana to end 2023 with sales of $10.46 billion, a decline of 23% year over year. But it also suggests the stock is priced at 0.6 times forward sales, which is quite cheap.
The Bear Case for CVNA Stock
One major headwind for Carvana stock is its high debt balance of $8.5 billion. Given its interest expense totaled $159 million in Q1, this metric will be over $600 million for 2023, accounting for over 40% of gross profits.
Comparatively, it ended Q1 with less than $500 million in cash, which suggests Carvana will have to raise equity capital to support its steep burn rate and dilute existing shareholder wealth.
Last year, Carvana acquired ADESA, a physical auction business, for $2.2 billion. The transaction was funded by debt at an interest rate of 10%. Carvana claimed the acquisition will allow the company to lower transportation costs and expand vehicle selection, but the same has come at a high cost.
The Final Takeaway
Out of the 20 analysts tracking Carvana stock, two recommend a “strong buy”, 16 recommend “hold,” and two recommend a “strong sell”. The average target price for CVNA stock is $14.73, which is 60% below its current trading price.
This morning, JMP Securities analyst Nicholas Jones increased his price target for CVNA from $25 to $50, while reiterating a Market Outperform rating. Jones expressed confidence that the company is making favorable strides, moving closer to achieving positive adjusted EBITDA and generating positive free cash flow.
However, I am not as confident as Jones that CVNA can continue to soar in the second half of 2023. While the company reduced operating expenses by 35% in Q1 and increased gross margins substantially, it is nowhere close to profitability. Its highly leveraged balance sheet and negligible profit margins make it a high-risk bet, especially if interest rates remain elevated. So in my opinion, it's time to pump the brakes on the stock.
On the date of publication, Aditya Raghunath 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.
