Carvana (CVNA), the Phoenix-based online used car retailer founded in 2012, has been grabbing headlines recently. Earlier this week, the company launched a program to make used electric vehicles (EV) and plug-in hybrid buying more attractive for customers with discounts of up to $4,000 for eligible vehicles. Against the backdrop of a growing used EV car market, falling inflation, and the possibility of a rate cut soon, the new offering comes at an opportune time from the company.
CVNA's stock price also got a boost from a recent upgrade to “Buy” from “Hold” at brokerage firm Needham, whose price target of $160 factors in an upside potential of 17.4% from current levels. Needham analysts Chris Pierce and Mackenzie Holleran added color to the upgrade by commenting, "After a volatile past we see Carvana becoming a profitable secular growth story, with increasing retail unit sales and improving gross profit per unit metrics from leveraging a high-fixed-cost base."
However, after the stock's blistering rally of roughly 157% on a YTD basis, does Carvana have the legs to keep running higher? Are its fundamentals and prospects strong enough to propel the stock further? Let's have a closer look.
About Carvana Stock
Carvana pioneered multi-story glass tower car vending machines, a novel way to pick up a car after purchase. The company emphasizes a customer-centric approach to streamline the car buying experience. It acquires vehicles through direct purchases, trade-ins, auctions and partnerships.
The actual selling of cars is carried out through Carvana's website and mobile app. Apart from a vast selection of vehicles and instant financing options, Carvana offers a 7-day money-back guarantee to ensure customer satisfaction.
Carvana's market cap currently stands at $26.32 billion.
Strong Q1 Showing
Carvana's results for the latest quarter have been a key contributor to its share price rally in 2024, as the company reported a beat on both revenue and earnings.
Net sales increased by 17.5% on a YoY basis to $3.06 billion in Q1, aided by a 19% growth in the core net retail vehicle sales to $2.2 billion in the same period. Further, the company reported EPS of $0.23 for the first quarter, which compared favorably to a loss of $1.51 per share in the year-ago period. The quarterly profit shocked the Street, with the market calling for a Q1 loss per share of $0.67.
Overall, over the past five quarters, Carvana's bottom line has missed expectations on just a single occasion.
Operational strength was also reflected in the company's retail vehicle unit sales of 91,878 vehicles and gross profit per retail unit of $6,432, denoting yearly growth of 16% and 49.5%, respectively.
Carvana also reversed its negative operating cash flow of $66 million from Q1‘23, with net cash flow from operating activities arriving at $101 million in Q1’24. Overall, the company closed the quarter with a cash balance of $252 million, higher than the current portion of its long-term debt of $194 million.
Prudent Strategic Moves
Carvana's used car sales soared online during the initial COVID-19 surge in demand. To meet this pandemic-related spike, they bulked up inventory. However, as the pandemic subsided, demand softened, leaving them overstocked. Rising interest rates and a tighter credit environment further pressured their high-volume sales model, which is reliant on accessible financing.
Carvana responded decisively to the inventory issue, implementing effective measures that halved their inventory by July 2023. This brought their average sales turnaround time to an estimated 65 days, a significant reduction aimed at streamlining supply, lowering operational costs, and ultimately stabilizing the business. The used car retailer's ability to dodge what seemed like an inevitable bankruptcy helped spark CVNA's comeback rally.
Additionally, Carvana's nationwide footprint offers a strategic advantage over competitors. Roughly 80% of the U.S. population resides within 100 miles of a Carvana Infrastructure and Reconditioning Center (IRC) or an ADESA auction site (a competitor).
Finally, Carvana's patented 3D viewing technology provides a unique edge. This immersive online experience allows customers to virtually inspect a car, spotting imperfections as if they were on a physical lot. The added convenience of doorstep delivery further enhances their customer offering.
With a fully integrated and online business model, Carvana is in a strong position in the growing used vehicle market - and in fact, JPMorgan recently named CVNA its top pick in the industry, citing its “unique secular tailwinds” relative to competitors.
Is Carvana Stock Overvalued?
That said, the breakout rally in Carvana stock has left it looking a little overvalued, based on some key metrics.
Since the company is not yet consistently profitable, the p/e metric isn't a useful measure. However, the stock is trading at a forward ev/sales and forward p/s of 1.65 and 1.23, representing a modest premium to the sector medians of 1.16 and 0.86, respectively.
Along with the rich valuation, the recent selling by Carvana's bondholders is another cause for concern. The founder and editor of Macro4Micro, Glenn Reynolds, told MarketWatch, “In equities, the Carvana history is a variation of the ‘riding the tiger theme,’ as in dangerous to get on and dangerous to get off (go short). Except in this case at material par-plus prices, it is not dangerous to get off for bondholders."
Analysts' Opinion on CVNA
Taking all of this into consideration, analysts have assigned an overall rating of “Hold” to Carvana stock. Out of 18 analysts covering the stock, 3 have a “Strong Buy” rating, 14 have a “Hold” rating, and 1 has a “Moderate Sell” rating.
The shares have already surpassed Wall Street's mean price target of $107.43, while the Street-high target price of $150 indicates an upside potential of about 10% from current levels.
